Nicosia backs interest rate increase

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Finance Minister Constantinos Petrides confirmed that European monetary bodies consider resorting to interest rate hikes to deal with high inflation.

Addressing a conference on the future of Europe organised by the Glafcos Clerides Institute, the minister’s comments were interpreted as affirmation that Cyprus favours increasing interest rates to regulate inflation.

The EU Central Bank contemplates the idea, triggering a debate between member states and academia.

Petrides praised the many benefits from Cyprus joining the EU, arguing its accession saved the country from a far worse fate.

“If the country had not been an EU member state and member of the Eurozone, in the 2013 fiscal crisis, we would have ended up like Turkey today.

The minister said the pandemic had caused a “cardiac arrest” to the EU, as the bloc had introduced legal restrictions on the economy for the first time.

Petrides said the EU, often criticised, showed quick reflexes for changing monetary policy and issuing the resilience fund’s joint debt instrument.

However, he warned that Europe still faced many challenges from the pandemic two years down the road.

“We should not underestimate the EU budgetary rules as these led to a strong euro and prosperity.”

“Debt has risen, and many countries need to address this issue urgently.

“Cyprus is not one of these countries because we successfully managed the situation well.”

The minister added that long periods of low interest are related to inflation recorded today, high real estate prices, and increased prices of many products.

Petrides said that inflation in the EU is similar to 1980-81, but he does not agree with those arguing that this is a temporary phenomenon.

He said the EU need to stand ready to manage it using monetary means.

It is understood that Petrides was addressing arguments against the increase of interest rates posed by the Cyprus Central Bank.

In comments made to US network CNBC, Cyprus bank governor Constantinos Herodotou argued that raising interests will not address the problem.

Herodotou said the CBC expected inflation to weaken in the coming years, emphasising the need for more measures by the EU.

According to ECB’s estimates, he noted that inflation is expected to decline in 2023 and 2024.

Herodotou argued that any rise in interest rates would not affect the main source of inflationary pressures brought on by the increased energy prices and disruption in the supply chain.