Cyprus Central Bank ups interest rates ahead of EU membership

The Cyprus Central Bank's Monetary Policy Committee (MPC) Friday increased basic interest rates by one percentage point ahead of the island's EU membership, when restrictions on movement of capital will be lifted.

The Lombard basic lending rate has risen to 5.5 percent and the Overnight Deposit Facility to 3.5 percent. The increase was unexpected as the committee had called an extraordinary meeting to review monetary policy in view of EU accession and the prevailing economic environment.

Cyprus, along with nine other countries, joins the European Union on Saturday.

"The decision was taken in view of European Union accession, when restrictions on free movement of capital will be lifted," said an MPC statement.

It said that with the decision "Cypriot interest rates become more attractive with positive effects in attracting foreign capital".

The central bank was also keen to kill off rumours that the Cyprus pound would be devalued as the island enters a more competitive single market.

"This sends a strong message of support for the Cyprus pound against groundless rumours of its supposed devaluation," said the statement.

Only the Greek Cypriot southern part of the island will enter the European Union. Turkish Cypriots in the north, separated by a UN-manned ceasefire line since Turkey's 1974 invasion, were denied the benefits of membership when a reunification plan collapsed on April 24.