Central Bank of Cyprus (CBC) and the country’s financial institutions agreed on Wednesday on a gradual reduction of banking deposits` interest rates from May 1 onwards.

During today’s meeting between CBC Governor Panicos Demetriades and representatives of financial institutions in Cyprus, views were exchanged on a draft memorandum CBC sent to credit institutions on Tuesday, a CBC press release issued here today says.

CBC Governor and financial institutions representatives “agreed on the implementation of the CBC’s proposal for a gradual reduction of deposit rates from May 1 2013 onwards”.

It is further noted that the move is expected to lead to a gradual reduction of lending rates.

The proposal provides that if the deposit rate offered by financial institutions exceeds euribor plus 300 basis points, then the financial institution must maintain additional specific equity.

Excluded from the international markets, Cyprus applied for a bailout after its two largest banks sought state aid following massive write downs of their Greek bond holdings amounting to €4.5 billion representing 45% of the island`s GDP.

The Eurogroup approved a €10 billion bailout for Cyprus, which will secure 10.6 billion for the recapitalisation of its banks from own resources. Under the agreement uninsured deposits in Cyprus` largest lender, Bank of Cyprus, will suffer losses up to 60% whereas, Cyprus Popular Bank, the island`s second largest bank, will be wound down.

The Cypriot economy is expected to contract sharply as a result of the downsizing of the banking sector which from 550% of GDP in 2012 will shrink to 350% GDP this year. According to a European Commission document, the Cypriot economy is projected to contract by 8.9% in 2013.