THE CENTRAL Bank yesterday decided to adopt a wait-and-see approach to interest rates, based on current economic conditions but still wary of lurking inflationary influences.
Following a meeting of the Monetary Policy Committee (MPC), Central Bank Governor Christodoulos Christodoulou said interest rates would remain unchanged for the moment, but warned that inflationary risks still existed.
On September 1, the Bank had unexpectedly increased its refinancing rate to 4.50 per cent from 3.25 per cent and its Lombard and overnight deposit facility rate by 25 basis points to 4.50 and 2.50 respectively.
The surprise hike was the first rate move in more than a year and was prompted by concern over inflation due to high fuel prices and an acceleration in the supply of money and credit to the private sector.
Inflation was running at 3.1 per cent at the end of August on the back of rising fuel prices, but dropped to 2.38 per cent for September, Christodoulou said yesterday.
He said inflation in the first nine months reached 2.87 per cent, compared to 2.53 per cent in the first nine months of 2005.
“Notwithstanding the relatively favourable development on the inflation front in September, inflationary pressures lurk, fuelled by high oil prices and the notable expansion registered by money supply and credit to the private sector,” said Christodoulou.
He also urged caution on the extension of credit in the private sector. “The MPC, once again, draws the attention of borrowers to the interest rate and exchange rate risk inherent in foreign currency borrowing,” Christodoulou said.
He said the Central Bank had issued guidelines to the commercial banks to take due care informing clients of the risks involved in currency exchange and the susceptibility of changes to interest rates.
Before the September 1 hike, the Central Bank had not altered its interest rates since a 50 basis point cut in June, 2005.
That move was then taken to arrest a rising Cyprus pound breaking the upper limit of its 2.25 percent fluctuation band around the euro.
The Cypriot currency is in ERM 2, a stabilisation grid anchoring it against the euro as a precursor to adoption of the single currency. Nicosia hopes to be able to adopt the euro in January, 2008.
