Interest rates slashed by 0.50%

The Monetary Policy Committee of the Central Bank voted to slash interest rates by 50 basis points effective May 20, 2005 in the first official move to bring Cyprus’ interest rates close to prevailing euro-zone rates following the inclusion of the Cyprus pound in ERM2 since May 2.

The Governor of the Central Bank Christodoulos Christodoulou announced following the MPC meeting that the key lending rate Lombard is now fixed at 4.75% from 5.25% previously while the deposit rate is also lowered from 3.25% to 2.75%, effective May 20.

The MPC noted that one of the key reasons why it decided to reduce interest rates was the strengthening of the Cyprus pound since its entry into the ERM2. During the last fortnight, the CYP has firmed by 1.8% against the euro.

The MPC believes that the the improving state finances also should be rewarded by lower rates. “The sharp reduction in the deficit and the anticipated further reduction for 2005, gives enough justification to reduce rates,” the MPC said.

The MPC however, did not appear to be overly concerned at the accelerating pace of inflation, with the HICP in April rising 2.8% year-on-year, which is well above euro-zone targets.