Cyprus traders expect unchanged interest rates today

But bond yields expected to fall longer term

Cyprus traders think that the chances that official interest rates in Cyprus will remain unchanged at the meeting today are better than even, although the low inflation rate for June could persuade the Monetary Policy Committee to drop rates by another 25 basis points.

Interest rates were cut by 50 basis points as of June 10, following an emergency of the Committee after bond yields dropped to 5.04%.

This was the second cut of 50 basis points in the space of a month, bringing the cumulative cut from the beginning of the year to 125 basis points.

Cyprus joined the EU’s Exchange Rate Mechanism (ERM2) on May 2, where it must stay for at least two years without devaluation before adopting the euro.

The official rate on main refinancing operations now stands at 3.25%, 125 basis points above its equivalent in the euro-area, while the marginal lending facility stands at 4.25%, compared with 3% in the euro-area.

“The possibility of an interest rate cut is not as much as it was before,” one Treasury trader told the Financial Mirror. “But there is a possibility of a 25bp cut, given the low inflation figure that came out a few days ago.”

However, he added that because the Central Bank has cut “aggressively” the past two times (by 50 basis points on each occasion), it was 70 in favour of no change and 30 against.

Over the longer-term, rates are still expected to fall, however.

“In the last 10-year auction the yield was 4.4% and in the 5-year auction it was 4.84%. We re definitely expecting those rates to drop again. the bond market has been rallying,” he said.

Both the European Central Bank and the Bank of England kept rates unchanged yesterday.

Fiona Mullen