Cyprus central bank expected to keep interest rates stable

NICOSIA – Cyprus’s central bank is expected to keep interest rates unchanged at a monthly review today after its last hike boosted the Cyprus pound and curbed currency outflows, say analysts. The official benchmark rate is 5.5 percent for advances and 3.5 percent for deposits. It has been unchanged since April, when the central bank jacked up interest rates by a full one percentage point to curb speculative pressure on the Cyprus pound on the eve of the island’s entry to the European Union. «I don’t expect any adjustment even though the current level of 5.5 percent is a bit on the high side,» said Pambos Papageorgiou at the Research Center of Cyprus College. «It was imposed mainly to counter any loss when currency restrictions were lifted and it worked. «But I think that in the current climate they will not go for a reduction because there is still a problem with the property boom, the economy is running at a faster pace, maybe 3.5 percent (growth by) the end of the year, and inflation is still high relatively high,» he told Reuters. Analysts say the rate increase stalled a currency flight which had been gathering momentum in the first five months of the year. This had been fueled by political uncertainty in the runup to a referendum on the divided Mediterranean island in which the Greek side eventually rejected a reunification plan. «In hindsight, the rate increase was a very smart move,» said independent economist Costas Apostolides. Net currency outflows between January 2004 and the end of April reached 140.73 million pounds ($296.5 million), exceeding the 134.01 million net outflow total recorded for the whole of 2003. From May until the end of August, there was an uninterrupted net inflow totaling 148.6 million pounds. While seasonality factors were also at play at the peak of the tourism season, it was primarily the impact of higher interest rates, a dealer at a commercial bank said. «The rate increase yielded results with an increase in inflows… that coupled with the fact that the European Central Bank (ECB) is unlikely to adjust its own rates soon suggests interest rates will be on hold,» said Sophronis Eteocleous, manager at the economic research and planning unit of Laiki Bank. The ECB was due to announce its monthly rate decision later yesterday. Eteocleous said Cyprus inflation was winding down with a forecast not exceeding 2.5 percent for the entire year compared to 4.1 percent in 2003. The rate-setting Monetary Policy Committee (MPC) may also be mindful not to affect buoyant growth by an adjustment, said Apostolides. «It could have an impact on growth rates,» he said. Gross domestic product expanded 3.4 percent year on year in the first quarter, aided by a mild recovery in the tourism sector.

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