THE Central Bank yesterday kept interest rates unchanged at a monthly review, shrugging off a recent surge in the Cypriot pound, which has in commercial dealings busted its euro fluctuation limits.
Interest rates would remain at 4.25 per cent for advances, 2.25 per cent for deposits and the Central Bank’s minimum bid rate would remain at 3.25 per cent, governor Christodoulos Christodoulou said.
Markets had not been expecting a change. Dealers said financial authorities were likely to wait for the full impact of two earlier declines before considering a further adjustment.
The Central Bank on May 20 cut interest rates by 50 basis points, and, unexpectedly on June 9, another 50 basis points.
The second decline was an attempt to arrest a strengthening Cyprus pound then on the brink of breaking its upper 2.25 per cent fluctuation band against the euro.
But since joining the European Exchange Rate Mechanism on April 29, there have been occasions where the currency has exceeded that, said Christodoulou.
“Currency inflows have led matters to the point where the Cyprus pound has exceeded its fluctuation band and now stands at 2.30 per cent (above euro parity rate).
“That’s not worrying. It would be if we had the oppposite,” said Christodoulou when asked about the strength of the domestic currency.
A Central Bank source later clarified that the appreciation Christodoulou was referring to was the commerical rate to clients, and not on the forex markets. On the forex market the level remained between 2.00 and 2.25 per cent, the source said.
“We believe the issue is under control and there is a strong element of seasonality attached to it,” he said.
A harder currency makes Cyprus more expensive for tourists, a sector which represents 15 per cent of the island’s gross national product.
Dealers say hard currency inflows have also been stoked by a rush by Cypriots to snap up perceptibly cheaper euro-denominated loans. That still creates demand for the pound because for settlement purposes, the local currency must still be bought.
Cyprus is seen adopting the euro by 2008, and should by then have phased out the present 1.25 point gap between its rates and those of the euro zone.
