Herodotou: 'Interest rates should be increased gradually'

The Governor of the Central Bank of Cyprus, Constantinos Herodotou, said he was in favor of the ECB gradually increasing key interest rates while keeping its options open, stressing that the European Central Bank should consider the impact of each increase and act accordingly.

Speaking to CNBC on the sidelines of the ECB Forum in Sintra, Portugal, Herodotus said the ECB was working to prepare a tool to tackle the fragmentation of government bond yields in the markets, but added that there were no final decisions yet.

This tool, he said, "should be large enough and powerful enough to be effective but designed to avoid ethical risk issues."

He also estimated that inflation in the eurozone is expected to peak this year, with the latest figures showing a decline next year and a decline towards the ECB target (2%) in 2024.

Asked about the pace of interest rate increases, Mr. Herodotus said he was a supporter of the gradual approach and open to options. He recalled that the normalization of the expansionary policy started in December with the announcement of the end of the emergency asset purchase program for the Covid-19 pandemic (PEPP) followed by the end of the APP program in July.  Consequently, the ECB announced the first interest rate increase in July followed by a new increase in September.

"It is important to recognize how much uncertainty there is because of the war in Ukraine and the surprises that come with energy prices," he said.

"Therefore I would prefer to raise interest rates gradually.  We announced an increase of 25 basis points, wait for the reactions in the economy and then move on with consequent increases," he said, adding that a gradual approach is also good for the economy.

Asked if the cycle of increases will be completed this year, he said that does not seem to be the best-case scenario for the Eurozone "and that is why it is important to see the impact of each increase and decide accordingly".

Limited connections with Russia

Asked about the interrelation of the Cypriot economy with Russia, Mr. Herodotus said that there is no dependence on the Russian economy. In particular, he said that only 4% of the total deposits have Russian final beneficiaries, while only 0.7% of the total loans belong to Russians.