Cyprus kept the key refinancing rate unchanged at 4.5 percent, which means the Central Bank is unwilling to align Cyprus pound interest rates with those of the euro-zone, which are 50 basis points higher at 4.0 percent, deferring its compulsory alignment until December.
As reported by the Financial Mirror previously, the rush by commercial banks to lend excessively to the property sector has left them with a shortfall on their deposits, which is why they are offering “top money†to attract deposits in order to sustain their over-extended loans.
Financial Mirror analysis shows that if the Central Bank had lowered rates now, then it would simply allow the banks more margin to bid for deposits, which in effect would be counter-productive and at the same time it would allow banks to push more loans towards the property sector, where the Central Bank is attempting a cooldown.
Rising inflation, compounded by higher fuel costs, and the need to curb credit growth were the reasons given by the bank’s monetary policy committee. The rate has not changed since Sept 2006.
“We will decide how to align our rates with the eurozone, which Cyprus joins from January 2008 at our next meeting,” Central Bank Governor Athanasios Orphanides told reporters.
“It really doesn’t make much of a difference if we change (rates) on the day of the meeting or wait until the end of the year,” he said after a meeting of the rate-setting Monetary Policy Committee (MPC).
The Cyprus Lombard rate will stay at 5.0 percent and the overnight deposit facility rate at 3.0 percent, said Orphanides, who will join the ECB’s Governing Council in January.
The Central Bank is worried that excessive credit, with property loans at CYP 2.2 bln by end of September is feeding into inflation and stoking property prices. Consumer prices rose 2.99 percent year-on-year in October, up from 2.6 in September. In the past year home prices have increased more than 10 percent.
Authorities asked commercial banks to limit mortgage lending earlier this year. “If loans continue at the same pace the rate of growth in credit will exceed 40 percent by the end of the year,” said Orphanides. “However I do not think the same rapid expansion rates will continue.”
