CYPRUS maintained a 75 basis point interest rate spread over ECB rates during a review yesterday, saying it had enough time to eliminate the margin before euro adoption and expressing concern at rampant credit growth.
Cyprus, along with Malta, are expected to adopt the euro on January 1, 2008. Both countries must by then phase out the differential with European Central Bank rates.
Local financial markets were not expecting an adjustment to the key interest rate of 4.50 per cent. While acknowledging the need to fall in line with ECB rates, analysts were worried a rate drop could offer an additional stimulant to buoyant credit expansion.
The refinancing rate was last changed in September 2006.
Domestic credit growth was running at an annual 18.6 per cent in March. M2 money supply also expanded by 17.0 per cent in March from an annualised 14.0 per cent in February, according to the May issue of the monetary policy report.
Members of the rate-setting economic policy committee who met yesterday highlighted “risks lurking from considerable expansion in money supply and credits to the private sector”, Central Bank Governor Athanasios Orphanides said.
“Since there are concerns in this direction there is no need to be hasty on narrowing the gap [with euro zone rates] earlier than what is required,” he said.
Inflation was running at 1.77 per cent year-on-year in April, within the EU guidelines.
The Central Bank kept its two other rates unchanged. The overnight deposit facility was left at 2.75 per cent and the Lombard rate at 4.75 per cent. The decision was unanimous among the monetary policy committee members, Orphanides said.
Cyprus is poised to join the euro zone on January 1, 2008, and the pound is to be locked against the euro on July 10.
The pound has spent two years in the European Union’s ERM-2 currency system, trading within plus or minus 2.25 per cent around a central parity rate of 0.585274 pounds to the euro.
In response to a question on the rate at which the pound will be locked against the euro, Orphanides said: “I don’t see any reason to expect this to be an issue… Of course that would be a matter for the finance ministers of the European Union but if they see things as we do, we see no reason for large adjustments.”
“I don’t see any devaluation, no way. Historically, there is absolutely no reason to harbour such thoughts.” (R)
