Rates cut as inflation rises

By a Staff Reporter

THE Central Bank yesterday cut its key lending rate by half a per cent to 4.5 per cent amid signs of slowing economic growth.

“Bearing in mind the extension of the (Iraqi) war and the vulnerability of the economy to outside developments the monetary policy committee has decided to cut its key refinancing rate,” Central Bank Governor Christodoulos Christodoulou said.

He added that by cutting the rate the committee thought it could contribute to the common effort for the recovery of the economy.

The bank’s monetary policy committee met two weeks earlier than expected.

Tourist arrivals in the first quarter have dropped, cutting forecasts of economic growth to 2.3 per cent in 2003 from initial estimates of four per cent.

Christodoulou also said the committee was worried about the rise in inflation, which reached 4.84 per cent in the first three months of the year.

“(The rise is) mainly due to temporary and short term factors with structural inflation remaining in relatively acceptable levels,” Christodoulou said.

Headline inflation rose 5.97 per cent year-on-year in March, spiralling to its highest point in months due to fuel and food price increases.

Headline inflation, reflected in the consumer price index, was 4.4 per cent in February.

The March tracker was stoked higher by rising prices of fuel, which impacted house electricity bills, and clothing and footwear. Fruit and vegetable prices also soared due to an unseasonal cold snap which reduced supply.

On a monthly basis, the March CPI index rose 2.09 per cent to 115.77 points.

The Finance Ministry said it stood by its forecast of CPI growth averaging between 4.0 and 4.5 per cent for 2003.

“The reasons are because of the increase in Value Added tax, some excise duties… there are a lot of temporary effects,” a finance ministry official told Reuters.

Cyprus increased its VAT rate by two percentage points on January 1 to 15 per cent, while a raft of tax adjustments have kicked in over the past 12 months ahead of European Union membership in May 2004.

Excluding the temporary influences, the finance ministry said it saw core inflation “close to” 2.0 per cent in March.

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