The Monetary Policy Committee (MPC) of the Central Bank’s Board of Directors decided to keep interest base rates unchanged at 4.5%. Newly appointed Governor of the Central Bank Athanasios Orphanides thus maintained the current 75 basis point spread between the Cyprus pound and euro key refinancing rates.
The MPC, took into account the recent Convergence Reports issued by the European Commission and the European Central Bank and concluded that the local economy is growing at a satisfactory rate, inflation is kept at low levels (decrease to 1.77 % in April 2007 vs. to 2.96 % in April 2006), and that the economy enjoys a high degree of convergence with the euro zone countries and thus is in good shape to adopt the euro by January 2008.
Cyprus, along with Malta, are expected to adopt the euro on January 1, 2008. Both countries must by then phase out the differential with European Central Bank rates.
Despite the deceleration of inflation, however, the MPC is concerned with the expansion in the money supply and increased bank credit to private sector. As far as bank credit is concerned, the MPC stresses the exchange and interest rate risks involved in foreign currency lending, as well as the negative impact from the widening of the Trade Balance from increased private lending.
” There is no need to be hasty in narrowing the gap [with euro zone rates] earlier than what is required,” Orphanides said.
The refinancing rate was last changed in September 2006.
The Central Bank kept its two other rates unchanged. The overnight deposit facility was left at 2.75% and the Lombard rate at 4.75%. The decision was unanimous among the monetary policy committee members, Orphanides said.
He also added that there is no issue of devaluation of the pound ahead of the final fixing in July or when the country adopts the euro.
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Domestic credit growth was running at an annual 18.6% in March. M2 money supply also expanded by 17.0% in March from an annualised 14.0% in February, according to the May issue of the monetary policy report.
Orphanides would not be drawn into discussing the correct value of share or property prices. “Compared to 20 years ago, property prices have risen. As for current prices, only time will show whether prices are over-valued or correctly valued. There are many factors and considerations to be taken into account,†said Orpahnides, adding that banks were not over-extended to the property sector.
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