Mountain of bank liquidity leaves Cyprus savers shortchanged

Cyprus depositors lose out as banks retain excess liquidityCyprus residents continue to receive some of the lowest interest rates on their savings in the eurozone, while businesses and households taking out loans face borrowing costs broadly in line with European averages, according to figures published by the Central Bank of Cyprus (CBC) on Tuesday. The CBC’s latest analysis of monetary and financial statistics highlights a persistent imbalance in how banks pass on changes in interest rates to depositors and borrowers, with deposit rates in Cyprus among the lowest in the eurozone and the transmission of interest rate increases and decreases to savings accounts remaining weaker than in almost all other member states. The findings come despite some improvement in deposit returns in September, when banks increased the average interest rate on new household deposits with an agreed maturity of up to one year to 1.62 per cent, from 1.35 per cent in August. For non-financial corporations, the corresponding rate increased to 1.70 per cent, compared with 1.56 per cent the previous month. However, the increases have not changed Cyprus’ position in the wider European comparison. The CBC said interest rates on both outstanding and newly opened deposits in Cyprus remained at the lower end of the eurozone, making the country an outlier compared with other member states. It attributed this partly to the excess liquidity held by Cypriot credit institutions, which is among the highest in the eurozone, as well as the relatively short maturity profile of the country’s banking sector. The scale of that liquidity is reflected in Cyprus’ Liquidity Coverage Ratio (LCR), which stood at 305 per cent in September 2026. This compared with a European Union median of 182 per cent and an average of 158 per cent in June 2026, the latest available figures for the bloc. The CBC also found that the extent to which banks pass on changes in market interest rates to depositors remains weak compared with almost all other eurozone countries, affecting both households and businesses. In other words, depositors in Cyprus have benefited less from changes in interest rates than their counterparts in most of the monetary union, even as banks maintain substantial liquidity. On the borrowing side, the picture is more balanced, although interest rates vary considerably depending on the type of loan and borrower. The average interest rate on new housing loans declined to 3.88 per cent in September, from 4.16 per cent in August, while consumer credit rates fell to 6.45 per cent, compared with 7.12 per cent previously. For businesses, however, borrowing became more expensive. The average interest rate on new loans to non-financial corporations of up to €1 million increased to 4.76 per cent, from 4.45 per cent, while loans exceeding €1 million carried an average rate of 4.40 per cent, up from 3.67 per cent. Despite these monthly movements, the CBC’s comparison with the eurozone suggests that Cyprus’ lending rates are broadly in line with European levels. For outstanding household loans, the average interest rate was marginally below the eurozone median, with a difference of minus 0.1 percentage points. For outstanding loans to non-financial corporations, the rate was 0.3 percentage points above the median. The comparison was similar for new lending, with the average rate on housing loans to households 0.2 percentage points below the eurozone median, while the corresponding rate for businesses was 0.3 percentage points higher. The CBC also found that the transmission of monetary policy changes to outstanding loans in Cyprus was broadly in line with other eurozone countries. More specifically, the reduction in lending rates during the monetary easing period between June 2024 and August 2026 compared favourably with the increases recorded during the monetary tightening period from June 2022 to December 2023. For new business lending, however, the transmission of interest rate reductions was stronger in Cyprus than the transmission of increases during the earlier tightening period. The figures therefore suggest that the main disparity between Cyprus and the wider eurozone is not necessarily the cost of borrowing, but the comparatively weak returns available to savers. The increase in September’s deposit rates coincided with a broader rise in new lending activity, with pure new loans reaching €596.2m, compared with €251.4m in August. The total value of new loans, including other categories, stood at €896.8m, up from €390.1m in the previous month. New lending for consumption increased to €32.2m, from €19.3m in August, while the total including other categories reached €33.7m, compared with €20.7m previously. Pure new loans for house purchases rose to €135.1m, from €114.4m, with the corresponding total increasing to €163.7m from €141.9m. Business lending also recorded a substantial increase. Pure new loans to non-financial corporations of up to €1m reached €45.4m, compared with €35.5m in August, while the total increased to €56.6m from €42.8m. For loans exceeding €1m, pure new lending climbed to €376.7m, from €77m, while the total rose to €635.7m from €178.1m. The CBC also examined how borrowers are responding to interest rate risks, finding a significant shift away from variable-rate mortgages. The proportion of new housing loans to households carrying variable interest rates fell from almost 100 per cent at the beginning of 2022 to just 9.8 per cent in September 2026, a level below the eurozone median. The central bank said this development could partly reflect borrowers initially choosing fixed-rate arrangements lasting three to five years, which subsequently convert into floating rates. It said the changing behaviour of borrowers in relation to interest rate risk was something banks should take into account when developing their risk management policies. Across new lending to households and non-financial corporations more generally, the proportion of loans carrying floating interest rates also declined substantially. That share fell from almost 100 per cent at the beginning of 2022 to 73.8 per cent in September 2026, although it remained slightly above the eurozone median. The CBC said the same factors could partly explain this development and should also be considered in banks’ risk management. Broadly, the figures paint a mixed picture for households and businesses. While September brought some improvement in deposit returns and lower interest rates on new consumer and housing loans, Cyprus’ savers continue to face a structural disadvantage compared with depositors elsewhere in the eurozone. For borrowers, the picture is less exceptional, with the cost of new loans broadly comparable to the European median, although businesses experienced increases in several lending categories during September. The central bank’s findings suggest that the country’s substantial banking-sector liquidity has not translated into similarly competitive returns for depositors, raising questions about how effectively banks are passing on changes in interest rates to their customers.