THE Central Bank yesterday kept interest rates unchanged, even though an acceleration in inflation and record credit growth pointed to an overheating economy.
Less than three months before adoption of the euro on January 1, 2008, the key refinancing rate remained at 4.50 per cent, 50 basis points above the euro equivalent.
The island’s central bank left the Lombard rate at 5.0 per cent and its overnight deposit facility rate at 3.0 per cent, its governor Athanasios Orphanides told reporters.
“Inflationary pressures continue to be fuelled by high oil prices and some food categories as well as the rapid expansion registered in money supply and loans to the private sector,” he said.
Credit to the private sector was contributing to high real estate prices and a widening of the trade deficit and was a cause of concern, Orphanides said.
Official figures show consumer inflation in September was running at an annual 2.63 per cent while credit to the private sector was up 24.2 per cent in August.
Orphanides said robust credit expansion was fuelling inflationary pressures. “Our economy is overheating and this will lead in the next few months to further inflationary pressures,” he said.
The governor urged the government, which faces elections in February 2008, to be prudent with fiscal policy. “With our euro area accession, our ability to keep inflation at bay with monetary policy will be reduced and we need to be assisted by fiscal policy in the short run,” he said.
Orphanides also expressed concern over possible wage increases above the rise in productivity.
“We could live with an inflation rate of 2.6 per cent. One of the worst case scenarios is to see excessive wage increases. This would create inflationary pressures for the next two, three or four years and will continue to accompany us”, he said.
Orphanides said that with the Cyprus pound being phased out, it would make no sense to raise interest rates at this stage to combat inflation, signalling Cyprus pound rates would remain unchanged until December.
“It would be good for the Cyprus economy to have higher rates [under different circumstances]. And it would also be good to have lower public spending” Orphanides said.
