CB leaves rates unchanged

The Monetary Policy Committee of the Central Bank left interest rates unchanged following its meeting on Friday, with 3 members voting for maintaining rates at present level while 2 members voted to reduce rates.

Central Bank Governor Christodoulos Christodoulou told reporters after the meeting that the key borrowing Lombard rate will remain unchanged at 4.25%, the refinancing rate at 3.25% while the deposit facility rate at CYP 2.25%.

Since the start of this year, the CB had reduced rates by a total of 1.25 percentage points to help kick start the economy but at the same time stop speculative activity as people borrow in cheap euros and then covert them into higher yielding Cyprus pounds.

Cyprus pound refinancing rate is still about 125 basis points above the euro refinancing rate of 2%.

Christodoulou also revealed for the first time that the MPC vote had been tight, with three members voting to keep rates unchanged while 2 member voted to slash rates further.

MPC members are highly satisfied with the performance of the Cyprus pound against the euro, recently steady at 0.5729, at the top of its recent range, supported by the influx of tourism revenue, but they are worried about the accelerating price of crude oil on international markets and its negative effect on inflation and local growth rate.

With the tourism season at its peak, the Cyprus pound has been supported by the influx of foreign currency, but MPC members voting against a rate cut are worried that a too hasty reduction in rates may lead to an influx of foreign currency out of the country. This may be the reason why the Central Bank decided to play it safe and wait for at least another month to see the impact on the local currency as the tourism season comes to an end.

MPC members are also closely watching developments in the oil market, as inflation in August climbed to 2.1% from 1.9% in July, while for the first eight months of the year, the rate is up 2.5% compared to 1.9% a year ago in the same period.