articles | 07 June 2024

Cypriot economy expected to benefit from ECB rate cut

The European Central Bank’s (ECB) decision to cut interest rates by 0.25 per cent on Thursday is expected to have a positive impact on the Cypriot economy, Professor Sofronis Clerides, Dean of the Faculty of Economics and Management at the University of Cyprus, said on Friday.

Speaking to the Cyprus News Agency (CNA), Clerides highlighted that a decrease in borrowing rates is expected to take place, although he expressed uncertainty about the corresponding trajectory of deposit rates. “Over the past two years, with the ECB’s rate hikes, borrowing rates in Cyprus increased proportionally, while deposit rates increased much less,” he said. 

According to Clerides, the ECB’s decision was largely anticipated, having been effectively announced through various statements since the beginning of the year. Although recent weeks showed some signs of inflation stabilisation, which tempered the expectations for a rate cut, the ECB proceeded with the reduction. “The ECB also signalled that these cuts might not continue indefinitely, taking into account the recent data that cast doubt on the ongoing reduction of inflation at previous rates,” he explained. He noted that while there was initially talk of a series of rate cuts starting in June, the ECB’s latest move came with reservations about future actions.

When asked about the potential impact of geopolitical developments on inflation, Clerides acknowledged the persistent risk, citing events like the pandemic, Russia’s invasion of Ukraine, and the conflict in Gaza as examples of unforeseen factors that could disrupt economic stability.

In response to whether the EU has the tools to manage such challenges, especially in light of the upcoming political and economic cycle post-European elections, Clerides pointed out the inherent difficulties in decision-making within the EU. “Unlike a single country with one government and parliament, the EU’s structure requires consensus among many countries, complicating the decision-making process,” he said. However, he acknowledged that in extreme cases, such as the pandemic, the EU has demonstrated its capacity to take unprecedented actions.

Regarding the impact of the rate cut on the Cypriot economy, Clerides predicted a reduction in borrowing rates, though he remained cautious about deposit rates. “With the ECB’s measures now moving in the opposite direction, we can reasonably expect a similar trend for interest rates in Cyprus, with a reduction in borrowing rates and less so for deposit rates,” he stated.

Finally, Clerides also pointed out that lower interest rates reduce borrowing costs, encouraging loans and investments by businesses, which is expected to have a positive effect on the economy.

Source: Cyprus Mail

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