Rate cuts due Monday

The European Central Bank yesterday slashed interest rates by 0.5 percent, cutting the key refinancing rate to 2 percent, the lowest level since 1948. This creates the conditions for similar cuts in Greek interest rates. The ECB move, which came in an effort to get Europe’s stagnant economy moving, demands that local commercial banks take decisive moves as well. Greek banks are expected to make the relevant announcements on Monday. Senior bank officials say that the 0.5 rate cut will come into effect almost immediately for businesses which borrow on a floating rate tied to that of the ECB or Euribor (or Euro Interbank Offered Rate, the rate at which euro interbank term deposits within the eurozone are offered by one prime bank to another prime bank). On the other hand, it is expected that the reduction in consumer and mortgage loan rates will be more modest, to the tune of 0.2 to 0.3 percent. Interest rate cuts on credit cards also are expected to be small. This is because there is no room for a significant cut in deposit rates, which are about 1 percent now, meaning that the banks will not have the corresponding benefit from the lower cost of money, especially those which hold large deposits. «The 0.5 cut in the ECB’s basic rate is important and so we will not be able to ignore it,» a senior official at a large private bank said. «This means that there will be reductions both in deposit rates and loans.» But because the rates, especially for deposits, are already so low, commercial banks are expected to be more conservative in their moves but will apply them to a broader range of products. One of the reasons the banks are wary is that they do not want to exhaust their room to maneuver in light of the possibility that there might be another rate cut by the end of the year, as ECB head Wim Duisenberg said yesterday that there was still room for more. But a top Greek banker said, «Already we don’t have much room to move in deposit rates, with close to zero interest in some categories.» He added that banks will concentrate on trying to get customers with mortgages to choose fixed-interest loans as the interest rates of these had already been reduced and will probably not drop further significantly, as they are believed to be at their lowest point historically.

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