Cyprus keeps rates on hold, worries on prices

NICOSIA (Reuters) – Cyprus kept interest rates unchanged yesterday for a 10th successive month, ruling out any move to cut them amid concerns that consumer and property borrowing may boost inflation. The key refinancing rate will remain at 4.50 percent, the Lombard rate at 5.0 percent and the overnight deposit facility at 3.0 percent, central bank governor Athanassios Orphanides told reporters. «Present economic conditions such as the relatively rapid economic expansion, which is based primarily on consumer spending and the building sector, is a disincentive for interest rate convergence through the reduction of domestic rates,» Orphanides said. «Suffice it to say that in the first seven months of 2007 credit is the same as the whole of 2006,» he said. Cyprus needs to phase out its 50 basis point premium to eurozone interest rates before it adopts the single currency on January 1, 2008. Many analysts expect the European Central Bank will raise its key rate to 4.5 percent by the end of the year from 4.0 percent now, saving Cyprus the need to make any move. Financial markets had not been expecting any Cypriot rate adjustment because of known concerns that the central bank has had over excessive credit for at least three months. «The way we are going we have less of a reason to lower interest rates,» Orphanides said. New loans taken out between January and May stood at 1.1 billion Cyprus pounds ($2.6 billion), more than twice the 450 million pounds issued by commercial banks in the first five months of 2006. «This increases the risks of bank (loan) portfolios. We cannot continue with these credit expansion rates and in our view the sooner this happens the better,» Orphanides said, referring to the need for banks to cut back on loans. Central bank economists are particularly concerned about what the loans are being spent on. «If credit was geared toward productive sectors our concerns could have been less,» said George Syrrichas, a senior economist at the bank. In the past week the central bank has asked banks to curb their threshold on property lending, officials say. Banks were told to cut the credit ceiling to 60 percent of the value of a property from 70 percent for individuals buying for a second time. For people making their first step up the property ladder the credit threshold will remain at 80 percent, officials said.

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