Is the market expecting a rate rise?
But 52-week is down
During the results of the auction conducted on June 22, 2006 for the acceptance of deposits of 14-day duration, bids amounting to CYP 622.5 mln were submitted, and an amount of CYP 520.0 mln was absorbed at a weighted average allotment rate of 2.78%.
The minimum and maximum allotment rates on June 22 were 2.30% and 3.22%, respectively.
The average yield was 46 basis points higher than the last 14-day auction on June 8, when the yield was 2.31%, while the yield on May 25 was 2.32%.
Before that, yields had been falling since March. A sudden reversal could mean that the market is concerned about rising inflation.
It could also mean that the market is expecting a rate-rise in Cyprus, following the decision by European Central Bank effective June 15 to raise official interest rates by 25 basis points.
The ECB’s marginal lending facility (the equivalent of Cyprus’ Lombard) was increased by 25 bp to 3.75%. It is now only 50 basis points below Cyprus’ 4.25%.
The ECB’s main financing operations rates is 2.75%, compared with Cyprus’ 3.25%, and the deposit rate is 1.75%, compared with Cyprus’ 2.25%.
Interest rates should converge with the ECB by the time Cyprus adopts the euro, due in January 2008.
However, some argue that having only 50 basis points to play with for a good year and a half is not enough, especially if inflation is higher than the eurozone, so the Central Bank of Cyprus should follow the ECB upwards.
Key long-term rates in Cyprus are also rising. During the auction on June 21 for five-year Government Registered Development Stock the yield was 3.87%.
At the last auction for five-year bills on March 30 the average yield was 3.72%, while the yield on February 1 was 3.67%.
52-weeks the other way round
However, 52-week Treasury bills have done the opposite.
During the auction for 52-week T-Bills on June 21, the yield was 2.79%. This is lower than than last auction, though this was held some time ago on March 30, when the yield was 2.92%, while on January 31 it was 2.95%.
The 13-week yield on the same day was also lower at 2.46%. At the last auction quite some time back on January 1, the average yield was 2.67%, while in June 2005 it was 3.95%.
Fiona Mullen
