Today’s decision by the Governing Council of the ECB to reduce its main refinancing operations rate by 25 basis points is a positive signal both for the euro area in general and Cyprus in particular. The transmission of monetary policy in Cyprus, however, depends crucially on the health of the financial system.
The financial reforms the CBC is undertaking under the stabilisation programme, including the appropriate handling of NPLs, are key to unblocking the monetary transmission mechanism which will, in turn, help reduce lending rates in Cyprus as well.