Cyprus rate cut unlikely, analysts say

NICOSIA (Reuters) – Cyprus is not expected to adjust interest rates in a monthly review today, even though a strengthening pound – a key reason behind a rate cut in June – hasn’t subsided, analysts say. Dealers said a 50 basis point cut on June 9 after an earlier lowering on May 20 had scant impact in quelling the surge on the Cyprus pound against the euro. However, financial authorities were unlikely to produce three back-to-back rate cuts while fuel-induced inflation remained a threat, they said. The minimum intervention rate is now 3.25 percent, 1.25 basis points above the ECB rate. Cyprus joined the ERM2 currency stabilization band in April and is seen adopting the euro, and gradually falling in line with eurozone rates, by 2008. «I think they will probably wait for the recent adjustments to work their way through the system,» said Costas Apostolides, an independent economist in Nicosia. Authorities now need to balance the need for low currency volatility, a key eurozone requirement, with the need to ensure cheap borrowing does not stoke a another key requirement that inflation be kept in check. «There are some concerns at inflation. Yes, they have a very strong pound, but there is a very big seasonality factor attached to it,» said Yiannis Telonis, head of Strategic Planning at Hellenic Bank. Sophoronis Eteocleous of Laiki Bank said a growing trend to borrow in euros was also stoking demand. «Banks are now offering loans in foreign currency, including housing loans. This is strengthening the pound because it still has to be converted,» he said. Higher interest rates from other European countries was one reason behind a surge in currency inflows. Cyprus had one of the lowest tax coefficients of 10 percent, dealers said.

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