Nicosia: Interest rates are where they are supposed to be, Governor of Central Bank of Cyprus (CBC) Christodoulos Patsalides, said in an interview to Econostream, adding that the current monetary policy of the European Central Bank (ECB) is neutral to restrictive, and underlining the importance of acting pre-emptively, especially as long as the energy crisis persists.
According to Cyprus News Agency, the Governor explained that the ECB Board decided to keep interest rates unchanged last week due to the lack of evidence supporting a rate hike. He noted that "second-round effects are not evident; expectations are anchored. So far, inflation is more or less in line with its expected path. In fact, the last figure came out a bit lower."
However, he expressed concerns about inflation risks, especially with the current energy prices, stating that "we are worried and need to monitor developments diligently and in depth," while acknowledging that the situation is closer to the ECB's baseline scenario.
Patsalides elaborated on potential factors that could trigger a change in September, citing "evidence of second-round effects, such as the price of oil affecting goods derived from oil, the extent that those goods find their way into input prices, and whether those effects feed through to consumer goods and consumer expectations, and later into wages."
Discussing the current economic landscape, he mentioned that "the price of oil has gone up and so have the prices of oil-related products, costs, and the PMI (Purchasing Managers' Index)." He emphasized the need to assess the impact concerning medium-term targets.
Patsalides also highlighted the increasing significance of being pre-emptive as risks rise, stating, "as more time passes without a resolution of the situation, and prices remain elevated, being pre-emptive gains in importance."
When questioned about the restrictiveness of the ECB's monetary policy, he described it as "neutral to restrictive," considering the latest developments and assessments. He concluded by noting, "tomorrow may be a different day. But, again, as time passes, given the energy crisis and the natural propagation process, the risk of inflation is higher every day."