Bank keeps rates unchanged but frets at inflation

THE Central Bank kept its key refinancing rate unchanged at 3.25 per cent at a monthly review yesterday but expressed concerns at consumer inflation running at 3.23 per cent in March.

The market had not been expecting an adjustment.

“This (decision) was also taken in the light of decisions by the Bank of England and the European Central Bank (on Thursday) to keep their rates unchanged,” Central Bank governor Christodoulos Christodoulou said after a review with the rate-setting Monetary Policy Committee.

Christodoulou added that the bank would from now on be citing its refinancing rate as its key interest rate and the benchmark in its dealings with commercial banks, to make it directly comparable to ECB rates.

“This is part of our process to align with the euro zone,” he told journalists.

The refinancing rate is the one used by the Central Bank in absorbing liquidity from commercial banks in auctions normally held every two weeks.

All three rates used by the Central Bank – the refinancing rate of 3.25 per cent, the Lombard rate of 4.25 per cent and the overnight deposit facility of 2.25 per cent were cited in the MPC decision yesterday.

The committee has in the past usually cited only Lombard and Overnight in its public announcements.

The March inflation figures, released earlier yesterday, had reaffirmed forecasts that authorities would not make an adjustment downwards.

“The Committee has expressed concern at an acceleration of inflation in March to 3.23 per cent compared to 2.64 per cent in February… it also noted the considerable expansion in money supply and bank credit,” Christodoulou said.

Analysts said they had seen an increase in interest rates as unlikely because of the present 75 basis-point premium Cyprus rates have over those in the eurozone.

Cyprus must close the interest rate gap before January 2008, the date it wishes to join the single currency.

“The prevailing wisdom is that Cyprus would not have to drop its rates, because the ECB is coming to close the gap,” said a treasurer at a Nicosia bank.

The ECB held its key rate at 2.50 per cent on Thursday, and quashed speculation it was heading for a May rate hike. It has raised interest rates twice since December from record lows of 2.0 per cent.

The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.