Interest rates cut by 50bps

Interest rates were slashed by another 50 basis points on Thursday following an unscheduled meeting of the Central Bank’s Monetary Policy Committee meeting. The rate reduction is effective from June 10, 2005.

Following the meeting, Governor of the Central Bank Christodoulos Christodoulou announced that the main lending Lombard rate has been reduced to 4.25% from 4.75% previously, the minimum bid rate on the main refinancing operations to 3.25% from 3.75% while the interest rate on the deposit facility to 2.25% from 2.75% previously.

On May 20, the MPC had slashed rates by 5bps after the Cyprus pound was admitted into the ERM2 on May 2.

One of the reasons cited by the MPC in reducing rates is the eagerness of Cyprus to converge its interest rates with those of the euro-zone and not to allow speculative pressures to be built in capital markets.

During the multiple bond auctions held on June 7, there was a massive over-subscription while the yield on the 5 and 10 year bonds traded very close to the Lombard rate.

Another reason which has helped the MPC to slash rates is the recent strength of the Cyprus pound, which since its entry into ERM2 has steadily climbed against the euro.

During the Tuesday fix, the Cyprus pound closed at the mid-rate of 0.5743 or 1.7413 in a spread of 0.5726-0.5760, its highest in two years and up about 1.5% since May 2.

The MPC said that record inflows amounting to the equivalent of CYP 157 mln since May 2 against outflows of CYP 58 mln were instrumental in tilting the balance for a rate reduction.

A rush to borrow in euros and then convert into Cyprus pounds has been instrumental in boosting demand for the currency, which is also being helped by seasonality factors, such as the influx of foreign exchange receipts as the tourism season gets into full swing and tour operators purchase pounds to pay for hotels and other services.

A tame inflation environment has also helped boost the call for lower rates. Headline inflation in May fell to 2.45% from 3.08% in April, the MPC concluded.