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ECB rate cuts and Cyprus economy

07/03/2003 07:23
The European Central Bank has decided to cut its basic interest rate by a quarter point to 2.5%, its second rate cut in four months, bringing Eurozone interest rates to a three-year low (2.5%), after the negative review of estimates for the growth rate of European economy for 2003. Wim Duisenberg, head of the ECB, stated that growth rate for this year will fluctuate at average levels and he indicated that he will not hesitate to proceed with a more aggressive measures if the situation worsens ECB’ s ability, however, to proceed to a further rate cut seems to be restricted by inflation that held above the bank’s 2%.

CB concerns

Meanwhile, the Monetary Committee of the Central Bank of Cyprus further to the recent ECB interest rate cut will have additional data on the development on the Cyprus economy by Friday. It is worth mentioning that on January 24, the Committee decided to keep an “expectant attitude” as 1) data for international economy were conflicting, b) inflation was expected to exceed 4% and 3) domestic economic activity was expected to recover with the growth rate reaching 4% in 2003. So far, CB’s estimates as to inflation are proven to be correct, while estimates with regard to international and domestic economy seem to turn negative. According to the ECB revised estimates, the European economy does not seem to recover for the second half of 2003, while as far as Cyprus is concerned, tourist reservations tend to reverse the Finance Ministry’s optimistic estimates, recording a 19% decrease in February.

Recovery: Uncertain

It is encouraging, however, the fact that the Cyprus economy partly recovered during the fourth quarter of 2002. Fourth quarter GDP grew by 2.1% compared to the third quarter of 2002(seasonally adjusted) and by 4% compared to the corresponding fourth quarter of 2001.

Nevertheless, there are much to be expected, by the outcome of Hans Blix’ report at the UN Security Council, which will determine the time framework of the American intervention in Iraq. President Bush has stressed the decisiveness of the United States to disarm Iraq, avoiding, however, to comment on Britain’s recent diplomatic efforts to give a new deadline to Saddam Hussein.