Nicosia backs interest rate increase

Finance Minister Constantinos Petrides confirmed that European monetary bodies are considering resorting to interest rate hikes to deal with high inflation.

Addressing a conference on the future of Europe organised by the Glafcos Clerides Institute, the minister’s comments were interpreted as affirmation that Cyprus favours increasing interest rates to regulate inflation.

The EU Central Bank is contemplating the idea, triggering a debate between member states and academia.

Petrides praised the many benefits from Cyprus joining the EU, arguing its accession saved the country from a far worse fate.

“If the country had not been an EU member state and member of the Eurozone, in the 2013 fiscal crisis we would have ended up like Turkey today.

The minister said the pandemic had caused a “cardiac arrest” to the EU, as the bloc had for the first time introduced legal restrictions on the economy.

Petrides said the EU, often criticised, showed quick reflexes for a change in monetary policy and the issuance off the joint debt instrument for the resilience fund.

He warned however that two years down the road, Europe still faced many challenges from the pandemic.

“We should not underestimate the EU budgetary rules as these led to a strong euro and to prosperity.”

“Debt has risen, and many countries need to address this issue urgently. Cyprus is not one of these countries because we were successful in managing the situation well.”

The minister added that long periods of low interests are related to inflation recorded today, the high real estate prices and the increase in prices of many products.

Petrides said that inflation in the EU is similar to 1980-81 but he does not agree with those arguing that this is a temporary phenomenon.

He said that we need to stand ready to manage it using monetary means.

It is understood that Petrides was addressing arguments against the increase of interest rates posed by the Cyprus Central Bank.

In comments made to US network CNBC, Cyprus bank governor Constantinos Herodotou argued that raising interests will not address the problem.

Herodotou said the CBC expected inflation to weaken in the coming years, emphasising the need for more measures by the EU.

He noted that according to ECB’s estimates, inflation is expected to decline in 2023 and 2024.

Herodotou argued that any rise in interest rates will not affect the main source of inflationary pressures, brought on by the increased energy prices and disruption in the supply chain.