Nicosia, Cyprus. Banks in Cyprus were among those in the euro area that increased deposit rates less aggressively following European Central Bank interest rate hikes, according to a new ECB working paper covering 2007 to 2024.
The study found that changes in depositor behaviour, rather than differences among banks, were the main factor shaping deposit pricing.
Regional differences in pass-through
The research found that banks in Cyprus and other southern euro area countries generally passed on a smaller share of ECB rate increases to savers than banks in northern Europe, highlighting differences in how monetary policy reached depositors across the currency bloc.
According to the paper, pass-through from ECB policy rates to overnight deposit rates has consistently been low, declined over time and varied according to the monetary policy environment.
Depositor behaviour
The authors said the slow increase in deposit rates after the ECB began raising rates in 2022 was largely driven by changes in the composition of customers holding overnight deposits, rather than by limited competition between banks.
Savers most sensitive to interest rates increasingly moved funds to higher-yielding alternatives, including term deposits and money market funds. This left a larger share of customers less likely to switch accounts.
As a result, banks had greater pricing power over the remaining pool of overnight deposits and faced less pressure to raise rates for those customers.
Long-term findings
The study covered the period from the global financial crisis, through years of negative ECB interest rates, to the monetary tightening that began in 2022.
It estimated the long-run pass-through of policy rates to household overnight deposits at a deposit beta of 0.247. The pass-through fell from about 0.3 during the 2007-2008 rate-hiking cycle to around 0.1 in the 2022-2024 period.
