Interest Rate Rise to Curb Inflation

A quarter point increase in interest rates, taking the Lombard marginal facility to 4.5 per cent and the overnight deposit rate to 2.5 per cent, was decided by the Monetary Policy Committee (MPC) of the Central Bank of Cyprus (CBC) on 1 September with the aim of reining in inflation. They were the first changes in official interest rates since they were cut June 2005 and followed a quarter point increase in the base rate of the European Central Bank on 3 August to 3 per cent.

Central Bank Governor Christodoulos Christodoulou said that the MPC had noted “with concern” a rise in the inflation rate to 3.22 per cent in July compared with 3.02 per cent in June. He explained that inflationary pressures had intensified as a result of high world oil prices, as well as an acceleration in money and credit supply in the private sector, a large part of it going to consumer expenditure.


New Budget Sets Course for Euro

Further reductions in the fiscal deficit and the public debt ratio featured in the state budget for 2007, as approved by the Council of Ministers on 6 September for submission to the House of Representatives. Finance Minister Michalis Sarris said that the budget projections confirmed that Cyprus is on course to adopting the euro single currency on the Government’s target date of 1 January 2008.

The budget provides for expenditure of C£4,066 million, 1 per cent more than in 2006, and revenue of C£3,311 million, up 11 per cent on expected 2006 receipts. The resultant deficit would be equivalent to 1.6 per cent of projected GDP compared with an anticipated outturn of 2 per cent in 2006, while public debt would be reduced from 67 to 64 per cent of GDP.

Mr Sarris expressed confidence that 2007 would be the third year running in which Cyprus met all five Maastricht criteria for euro-zone membership, covering permitted rates of budget deficit, public debt, inflation, interest rates and exchange rate stability. He said that the economy was “robust”, with a current annual growth rate of around 4 per cent, registered unemployment at 3.7 per cent and inflation running at an annual rate of 2.6 per cent. He also revealed that the parity of the Cyprus pound is expected to become officially locked into the euro in June or July 2007.

Firmly ruling out any tax increases in 2007, Mr Sarris described the new budget as a continuation of the “successful combination” of the purification of the public finances with development spending would increase by 8 per cent, to C£430.7 million, with commitments favouring the fields of education, housing, health, research and innovation.

Addressing the general assemblies of the World Bank and the International Monetary Fund (IMF) in Singapore on 20 September, Mr Sarris said that a financially viable solution to the Cyprus problem, which reunited financial institutions and markets, is the key to long-term economic and political stability and growth on the island.