Cyprus central bank seen holding interest rates steady
NICOSIA – The Central Bank of Cyprus is expected to keep its interest rates unchanged at its Monday meeting, despite increasing inflationary pressures and rapid increases in credit expansion, analysts said. Interest rates in Cyprus are currently at 4.5 percent, 50 basis points above those in the eurozone, and the Central Bank of Cyprus is not expected to attempt to reduce this gap. «It is unlikely for the Central Bank of Cyprus to raise interest rates at this point, especially as the European Central Bank left interest rates unchanged and there is the potential of maintaining rates unchanged in its October meeting (if US subprime problems persist),» Michalis Kyrou from Bank of Cyprus told Reuters. The Cypriot economy is buoyant, with growth at 3.7 percent in the second quarter. Inflation accelerated in August to 2.5 percent from 2.4 percent in July. Bank claims on the private sector increased 22.7 percent year on year in July with the bulk of new credit being diverted to housing purposes, and central bank data showed that personal and professional loans, which include housing loans, rose by 34.4 percent year on year. Analysts are divided over the effects of local credit growth on inflation. «We are likely to have increased inflationary pressures caused by the rapid growth in credit but people are going to blame the euro for this. You can’t have personal and professional loans increasing at an annual pace of 30 percent indefinitely,» Michalis Florentiades of Hellenic Bank said. Cyprus is to join the eurozone on January 1, 2008. Sophronis Eteokleous from Marfin Popular Bank said: «In Cyprus, credit has a more limited impact on inflation, because the economy is open. Inflation depends mostly on imported inflation and wage increases? (Currently) many (merchants) are increasing prices ahead of the euro introduction.»
