**Eurozone and Cyprus Business Borrowing Costs Rise While Mortgage Rates Stabilise**
In June, the European Central Bank (ECB) reported a notable increase in borrowing costs for businesses across the eurozone, while mortgage rates remained relatively stable. This trend highlights a significant divergence between the eurozone and Cyprus, where deposit rates continue to lag behind those in the broader monetary union.
The ECB's latest data indicated that the composite cost-of-borrowing indicator for new corporate loans rose by 15 basis points, reaching 3.79%. In contrast, the rate for new housing loans showed little change, holding steady at 3.51%. This stability in mortgage rates contrasts with the upward movement in borrowing costs for businesses.
In tandem with these developments, banks throughout the euro area have increased returns on deposits. The composite interest rate for new fixed-term corporate deposits climbed by 17 basis points to 2.21%, while the rate for new household fixed-term deposits rose by 13 basis points to 2.09%. These increases reflect the ECB's ongoing adjustments to monetary policy.
The Central Bank of Cyprus (CBC) released its own interest rate data for June, which revealed a slight uptick in deposit rates within Cyprus. The interest rate on household deposits with an agreed maturity of up to one year increased to 1.42%, up from 1.25% in May. Similarly, the rate for deposits by non-financial corporations rose to 1.41%, compared to 1.31% the previous month. Despite these increases, Cyprus continues to offer some of the lowest deposit rates in the eurozone.
The CBC attributed the sluggish response of deposit rates in Cyprus to the structural characteristics of its banking system, which features exceptionally high liquidity levels and a relatively small sector size. As of June 2026, Cyprus' Liquidity Coverage Ratio stood at 310%, significantly higher than the European Union median of 189% and an average of 158%. This high liquidity reduces competitive pressure on banks to elevate deposit rates, leading to a weaker transmission of ECB monetary policy to depositors compared to other eurozone countries.
While deposit rates in Cyprus have not kept pace with those in the eurozone, lending rates appear to be more aligned. The CBC noted that the weighted average interest rate on new housing loans was 0.2 percentage points below the eurozone median, whereas rates on new corporate loans were 0.3 percentage points above it. In June, mortgage rates slightly decreased to 4.04%, down from 4.06% in May, while consumer lending rates fell to 6.50% from 6.95%.
However, business borrowing costs in Cyprus saw an increase. Rates on loans of up to €1 million rose to 4.32% from 4.27%, and rates on larger loans climbed to 4.07% from 3.85%. This trend mirrors the ECB's findings, which also reported higher borrowing costs for businesses across various loan categories.
Despite the rising costs of borrowing, the CBC reported a significant increase in lending activity during June. New lending reached €626.20 million, a substantial rise from €361.90 million in May. This surge was largely driven by loans exceeding €1 million, which jumped to €387.50 million from €121.50 million.
The CBC also observed a shift in Cyprus' mortgage market towards fixed-rate borrowing. The proportion of new housing loans with variable interest rates has decreased to 10.9% in June 2026, down from nearly 100% at the start of 2022. This trend places Cyprus below the eurozone median and suggests that borrowers are increasingly opting for fixed-rate products for the initial three to five years of their loans. This shift reduces their exposure to future interest rate fluctuations and aligns the domestic mortgage market more closely with broader eurozone practices.
In summary, while borrowing costs for businesses in the eurozone are on the rise, mortgage rates in Cyprus have remained stable. The disconnect between deposit rates in Cyprus and those in the eurozone underscores the unique challenges faced by the island's banking sector, as it navigates a complex economic landscape.