Cyprus CYP – EUR interest rate spread remains at 100bp

The Central Bank of Cypus Monetary Policy Committee (MPC) voted by 6 votes to zero in favour of maintaining interest rates at the same level.

The interest rates on the marginal lending facility remains unchanged at 4.25%, compared with the euro-area equivalent of 3.25%.

The interest rate on the deposit facility remains 2.25%, compared with the eurozone’s 1.25%, while the rate on main refinancng operations remains at 3.25%, compared with the eurozone’s 2.25%.

Following an extensive discussion, the MPC noted that the growth rate of domestic economic activity remains satisfactory, whereas domestic inflation edged higher to 2.25% (year on year( in January, compared with 1.99% in the previous month.

On the fiscal front, the MPC noted with satisfaction the containment of the 2005 fiscal deficit to levels below 2.5% of GDP.

At the same time, the MPC stressed that the 2005 fiscal outturn should not lead to any complacency, and that the consolidation of public finances should be maintained, underpinned by structural fiscal measures, so as to achieve the target of euro adoption on January 1, 2008.

With regard to monetary developments, the MPC took into serious consideration the significant growth being recorded by bank credit and money supply, the foreign exchange outflows observed due to seasonal factors, as well as the continuing high exchange rate of the Cyprus pound against the euro.

The Cyprus pound has risen against the euro since it joined the Exchange Rate Mechanism in May 2005.

Taking into account all the above, and also the fact that at their recent meetings the European Central Bank and the Bank of England maintained their wait-and-see stance, while the US Federal Reserve proceeded to yet another rate increase of 25 basis points, the MPC unanimously decided to maintain its wait-and-see stance, leaving official interest rates unchanged.