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The end of cheap money

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The end of cheap money

The interest rate hike window opened by Christine Lagarde in conjunction with the gradual end of loose monetary policy is changing the economic policy environment. The state, but also households and businesses, should start thinking about how to manage their finances in an environment of higher interest rates and more expensive lending.

The major investment banks in a series of analyzes released anticipate that the key interest rate of the euro will be around 0% by the end of the year.

Cyprus's participation in the eurozone offers many advantages to the country and the Cypriot economy. This participation allows the state, households and businesses to borrow at historically low interest rates. However, compared to other eurozone countries these interest rates are high.

We have repeatedly written in this column that the Cypriot economy has come a long way since the 2013 crisis. Today, public finances are sound (and they supported the real economy during the pandemic crisis) and banks full of capital and liquid and close to relieving them of the burden of “red” loans on their balance sheets. The work, however, is not over. This is reminded to us by the credit rating of Cyprus, which is only one step away from the “garbage” category.

The ECB's monetary policy has allowed Cyprus to reduce its average borrowing cost to 1.7% and to issue a recent ten-year bond at an interest rate of 0.95%. After the Lagarde announcements, the yield climbed to 1.23%.

In general, the European bond market has come under pressure in the face of the prospect of withdrawing existing monetary policy. Under the Asset Purchase Program (APP), the ECB has raised bonds with a nominal value of more than 3 trillion from the secondary market. and through the emergency pandemic asset purchase program (PEPP) another € 1.6 billion. PEPP was expected to stop, but for APP the expectation was to remain active. Persistent inflation is changing plans. The Governing Council of the ECB has decided that net purchases will expire shortly before key interest rates begin to rise. The ECB will continue to reinvest, as necessary, the amounts from the repayment of the securities. These announcements brought mass liquidations of European bonds. Even the German ten reached 0.17%. The Greek climbed to 2.09% and the Italian to 1.70%. The third highest performance is that of Cyprus.

The way for Cyprus not to suffer from the size of interest rates goes through the upgrade of the country's credit rating. Reducing the risk will lead to cheaper borrowing costs and the ECB's policy will be “indifferent”. This requires an aggressive reduction of debt, public and private, permanent production of primary surpluses, strengthening of banks and of course reforms everywhere. The ECB's safety cushion will be gone and from now on inaction will come at a cost.

Source: politis.com.cy

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