THE CENTRAL Bank yesterday defended its move to keep interest rates unchanged, saying it avert inflationary tendencies by discouraging heavy consumer borrowing that could lead to a rise in the price of commodities.
On Monday Central Bank governor Athanassios Orphanides said the regulator decided to maintain the key refinancing rate at 4.50 per cent, the Lombard rate at 5.0 per cent and the overnight deposit facility at 3.0 per cent.
Cyprus needs to align its interest rate to the eurozone’s, which currently stands at 4.0 per cent, although analysts expect the European Central will raise its key rate to 4.5 per cent by the end of the year, saving Cyprus the need to make any move.
The Central Bank’s guideline to restrict loans applies to commercial banks only, although co-operatives are also expected to fall in line.
Giorgos Sirihas, a senior economist with the Central Bank, said yesterday the regulator was concerned with increased borrowing, which has doubled compared to last year.
New loans taken out between January and May stood at £1.1 billion, more than twice the £450 million issued by commercial banks in the first five months of 2006.
“Because of the considerable credits, it would not be advisable to reduce the interest rate now as that would contribute to a rise in loans,” said Sirihas.
Banks have been told to cut the credit ceiling to 60 per cent of the value of a property from 70 per cent for individuals buying for a second time.
For the first domicile, the credit threshold will remain at 80 per cent.
Though conceding the decision might be unpopular with certain sectors, especially realtors, Sirihas said it was a sound move aimed at curbing rises in the price of goods, which usually go hand-in-hand with real estate prices.
“We believe the prices of commodities will go up if no steps are taken. The Central Bank feels that the current rate of the increase in loans cannot be sustained. It’s not only the amount of money involved, it’s where it’s channelled also.”
Loans mostly went to consumer spending and the building sector, he said.
“It is our contention that if this trend were to continue, that would lead to inflationary pressures and, yes, a rising cost of living ultimately,” added Sirihas.
Apart from consumers, the Central Bank’s policy is also set to affect small real estate developers, especially the smaller players, since they will now have to put up more capital up front. For large-scale projects, the 10 per cent difference in the borrowing threshold could translate into hundreds of thousands of pounds.
While welcoming the new threshold per se, opposition DISY called it a standalone measure that would not have any real impact on constantly rising house prices.
DISY’s No. 2 Averoff Neophytou said the government should instead be looking at the high VAT levied on real estate purchases. Often, he said, people end up paying up to 30 per cent on the value of a house in taxes.
But economist Dr. Stelios Platis said one should look at the big picture.
“I think the Central Bank’s is a correct policy. It’s a serious approach that will ensure longevity of the real estate sector, as it will deter people from borrowing well above their capabilities.
“Also, bear in mind that in practice, banks tend to break the rules lend more than the 70 per cent allowed. This is achieved by over-estimating the value of a property. Sometimes, this can mean that a bank finances up to 100 per cent of a purchase.”
Bank sources told the Mail they did not expect the real estate market to take too much of a hit.
“On the consumer end, a lot of foreign buyers are coming in who have the cash to make investments,” the sources said.
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