Nicosia: The recent monetary policy cycle of the European Central Bank (ECB) has significantly altered the composition of bank lending in Cyprus, with longer-term fixed-rate loans becoming the dominant form of new lending, particularly in the housing market, according to a new economic bulletin published by the Central Bank of Cyprus (CBC).
According to Cyprus News Agency, the CBC noted that the ECB's monetary tightening cycle between July 2022 and September 2023, followed by policy easing from June 2024 to June 2025, was accompanied by a marked shift towards loans with an initial fixed-interest period of more than one year. This development, along with increased lending secured by deposits, contributed to lower lending rates, a convergence of financing conditions with the euro area, and a narrowing of the gap between lending and deposit rates.
The analysis highlighted that the most significant change was recorded in new housing loans. Until 2022, the overwhelming majority of new mortgages carried variable interest rates or fixed rates with an initial fixation period of up to one year. Since then, loans with fixed interest rates for one to five years have become the prevailing option. A similar trend, though less pronounced, was observed in new business lending, and the share of loans with fixed rates exceeding five years also increased gradually.
The CBC attributed this shift to stronger demand from borrowers seeking greater predictability in debt-servicing costs during a period of elevated interest rates, as well as banks expanding their range of competitively priced fixed-rate products. This change has reduced the exposure of new borrowers to interest-rate fluctuations, while transferring part of the interest-rate risk to credit institutions.
The bulletin also noted substantial convergence of financing conditions in Cyprus with those prevailing in the euro area. Since May 2025, interest rates on new housing loans in Cyprus have remained below the euro area's median level. In business lending, the gap has narrowed considerably, although lending rates remain somewhat higher than the euro area median due to the specific characteristics of corporate financing.
Furthermore, the spread between lending and deposit rates has narrowed significantly. For households, the difference compared with the euro area median declined from 2.3 percentage points in October 2023 to 0.4 percentage points in April 2026. For non-financial corporations, the gap narrowed from 2.5 to 0.8 percentage points over the same period.
According to the CBC, the remaining differences largely reflect the slower adjustment of deposit rates in Cyprus, owing to the banking sector's high excess liquidity, stable deposit base, and the structural characteristics of the domestic banking system.
The Central Bank noted that the growing use of longer-term fixed-rate loans makes the transmission of ECB interest-rate changes to the cost of financing in the economy more gradual. As a result, the composition of new lending has become an important factor in understanding the transmission mechanism of monetary policy in Cyprus.