Cyprus’s banking market has undergone a significant change following the European Central Bank’s latest monetary policy cycle. Loans with longer initial fixed-rate periods now dominate new lending, particularly in mortgage financing, according to an economic note published by the Central Bank of Cyprus.
Borrowers seek greater predictability
The ECB’s monetary tightening between July 2022 and September 2023, followed by policy easing from June 2024 to June 2025, prompted a marked shift towards loans with an initial fixed-rate period exceeding one year.
Combined with increased lending secured by deposits, the trend contributed to lower borrowing rates, closer alignment between financing conditions in Cyprus and the euro area, and a narrower gap between lending and deposit rates.
The Central Bank attributes the change to increased demand for greater certainty over debt-servicing costs during a period of higher interest rates. Banks also expanded the range of fixed-rate products available and offered more favourable pricing.
As a result, new borrowers became less exposed to interest-rate fluctuations, while part of the associated risk shifted to credit institutions.
Mortgage lending records biggest change
The most pronounced shift was recorded in new housing loans. Until 2022, the overwhelming majority of new mortgages carried variable rates or an initial rate fixation period of up to one year.
Loans with rates fixed for between one and five years subsequently became the dominant category. A similar, though less pronounced, trend was recorded in new business lending, while the share of loans with rates fixed for more than five years also increased gradually.
Cyprus rates converge with euro area
The analysis also identifies substantial convergence between financing conditions in Cyprus and those across the euro area.
Since May 2025, interest rates on new housing loans in Cyprus have remained below the euro-area median. Differences in business lending rates have also narrowed considerably, although Cypriot rates remain higher because of the particular characteristics of domestic corporate financing.
Lending and deposit rate gap narrows
The gap between lending and deposit rates has also contracted significantly.
For households, the difference compared with the euro-area median fell from 2.3 percentage points in October 2023 to 0.4 percentage points in April 2026.
For non-financial corporations, the gap declined from 2.5 to 0.8 percentage points over the same period.
The Central Bank said the remaining differences mainly reflect the slower adjustment of deposit rates in Cyprus, owing to high excess liquidity, a stable deposit base and the characteristics of the domestic banking system.
Impact on ECB policy transmission
The growing use of loans with longer fixed-rate periods means changes in ECB interest rates are transmitted more gradually to financing costs in the Cypriot economy.
The Central Bank concluded that the composition of new lending has therefore become an important factor in assessing how monetary policy is transmitted in Cyprus.
Source: CNA.
