Cyprus credit growth to slow

NICOSIA – Bank credit in Cyprus expanded by 28.2 percent year-on-year in December, but the rate of growth is expected to slow this year, analysts said yesterday. December credit figures followed a 27.6 percent growth rate in November, and 16.3 percent in 2006, capping a year of warnings from the central bank to commercial banks about excessive credit propping up an overheating property market. The December figure was just shy of the highest level for 2007 – 29.0 percent recorded in August. Despite uncertainty on international financial markets, internal factors – in particular construction, real estate, consumption and advances to non-residents – will be the main driving force behind credit expansion, analysts said. «The high (credit) growth rates we saw in 2007 cannot be further sustained and will fall though they will remain double digit,» said Sophronis Eteocleous, manager of economic and financial research at Marfin Popular Bank in Nicosia. The increase in credit is related to a real estate market frenzy triggered by speculation over the timing of introduction of value-added tax on land sales. The precise timing of the imposition of the tax on transactions is unclear. House prices in Cyprus rose in 2007 by 19.2 percent year-on-year compared to 6.6 percent in 2006. Michael Florentiades, head of economic analysis at Cyprus’s Hellenic Bank said he did not expect Cyprus to be directly affected by the international subprime credit crunch but he could not rule out an indirect impact. «What worries me is a possible slowdown in the real estate market coming from the UK, as UK citizens account for the largest group of of foreign house buyers. There (in the UK) we see prices already falling and this could affect prices in Cyprus,» Florentiades said. Ten days before losing responsibility for monetary policy on January 1, 2008, when Cyprus joined the eurozone, the island’s central bank eliminated a 50-basis-point gap between Cyprus rates and those in the currency bloc. The central bank had throughout last year repeatedly warned over the impact of credit growth on inflation and real estate prices. The consumer inflation rate accelerated from 1.86 percent in June to 3.91 in December and was 2.4 percent for January to December 2007.