Politicians have mooted passing legislation to force the banks to lower their lending rates in a bid to provide households and businesses with breathing space amid the recession. Any move must be carefully studied, the bank association said, “so that the mandatory reduction of lending rates will not prove catastrophic for banks and the economy.”

According to the association, the European Central Bank (ECB) has said that any attempt to regulate rates required a comprehensive evaluation of the impact in order to ensure that the public benefit will make up for potential adverse effects on banks, their customers and the economy. The association also pointed out that interest rates reflected the risk of the borrower as well as the risk undertaken by the lender. It also took contemporary financial conditions into account, the association said. “A lower rate from what is prescribed means under-pricing the risk,” the association said. “This mainly affects new borrowers and it raises the danger of stagnating the market.” The association stressed the need for consultation with all parties involved, adding that it will give its position when an official proposal was put on the table.

Data provided by the ECB for August showed that despite a dramatic drop in deposits in Cyprus borrowing has become more expensive. The data indicated that a significant reduction in deposit interest to 2.0 per cent has not brought about any reduction in lending costs. The ECB reported that interest rates for business loans had increased to 6.5 per cent in July compared with 6.35 per cent in June – the highest in the eurozone.

Interest rates for business loans in Cyprus were almost 3.5% higher than the eurozone average of 3.3%. And rates on housing loans went up from 5.37% in June 2013 to 5.6% by July. By comparison, the average interest rate for housing loans in the eurozone was 3.28%.

Source: Cyprus Mail