Cyprus central bank leaves deposit rates unchanged at 3.5 pct

NICOSIA (Reuters) – Cyprus’s central bank kept interest rates unchanged at a monthly review yesterday, saying the economic climate did not warrant an adjustment. The bank’s maintained interest rates at 3.5 percent for deposits and 5.5 percent for advances. «The bank is in waiting mode,» central bank governor Christodoulos Christodoulou told reporters. Economic growth, estimated at 3.2 percent for the first quarter which are the latest official figures available, is satisfactory but the level of the government deficit remained worrying, Christodoulou said. The high price of crude oil on international markets had not had an impact on the economy, but could add to inflationary pressures depending on how long prices stay high, he said. Fuel is a key component in the consumer price index, the benchmark for a cost-of-living allowance claimed by unionized workers twice a year. The last rate adjustment was in April, when the bank unexpectedly raised interest rates by one percentage point to protect the Cyprus pound from a currency flight on the eve of the country’s entry into the European Union. Central bank statistics suggest that the rate increase stopped an acceleration of currency outflows that began in January. Since May, there has been an uninterrupted net inflow of funds, driving the Cyprus pound 1.64 percent higher against the euro, Christodoulou said. The European Union newcomer is struggling to contain a bloated deficit which risks derailing its stated plans of joining the eurozone in 2007. The budget deficit is set to exceed 5.0 percent of gross domestic product this year, compared to the eurozone cap of 3.0 percent. Questioned on the timing of applying for ERM2 admission, Christodoulou said he hoped to broach the issue with the government soon. He said he did not advocate a postponement of the eurozone target.

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