Central Bank of Cyprus keeps rates unchanged, warns of economy ‘overheating’

The Central Bank of Cyprus has kept interest rates unchanged, with its Governor Athanasios Orphanides saying after a meeting of the Monetary Policy Committee on Monday that the key refinancing rate remained at 4.50%. The Bank left the Lombard rate at 5.0% and its overnight deposit facility rate at 3.0%.

Figures show consumer inflation in September was running at 2.63% from 2.47% in August and 2.43% in July. For the first nine months of the year inflation reached 2% compared to 2.87% in the corresponding period last year.

“Inflationary pressures continue to be fuelled by high oil prices and some food categories as well as the rapid expansion registered in money supply and loans to the private sector,” Orphanides said.

Credit to the private sector was contributing to high real estate prices and a widening of the trade deficit and was a cause of concern, he noted.

Orphanides said robust credit expansion was fuelling inflationary pressures. “Our economy is overheating and this will lead in the next few months to further inflationary pressures,” he said.

The Central Bank Governor urged the government to be prudent with fiscal policy. “With our euro area accession, our ability to keep inflation at bay with monetary policy will be reduced and we need to be assisted by fiscal policy in the short run,” he said.

Orphanides also expressed concern over possible wage increases above the rise in productivity as Cyprus prepares to join the eurozone on January 1, 2008.

“We could live with an inflation rate of 2.6%. One of the worst case scenarios is to see excessive wage increases. This would create inflationary pressures for the next two, three or four years and will continue to accompany us,” he said.