We still live in interesting times. The banks are very cautious about lending to each other as they are still unsure where the losses relating to the bad US home loans finally end up. Also the banks are having to hoard cash as they are likely to find it very difficult to offload all the debt they have taken on funding the numerous private equity deals we saw in the first half of this year. In the midst of this uncertainty the Bank of England took the prudent approach and kept interest rates on hold. The BOE did take an unusual step by making an announcement stating that they were concerned about the credit markets and thought this uncertainty would dampen inflation in the short/medium term and this has led the market to believe that increased UK interest rates are also unlikely in the short to medium term. Since this announcement sterling has steadily lost ground against the Euro.
The Cypriot £ is pegged to the Euro and as the Euro has been the main beneficiary in the current climate we have seen the Cypriot £ strengthen to Cy.£0.854/£1. The European Central Bank did meet last week and the ECB held Euro interest rates. However the ECB did announce that it felt that interest rates were still too accommodative [i.e. too low] and therefore would need to be increased sometime. This increase is unlikely in the short term but was more bullish than the BOE's announcement on sterling. The Euro land economy still continues to move along nicely. However, it still has a degree of dependency on the US and that means that it will be concerned about what is happening in the US. Again would seem to make sense to buy Cypriot £'s when we see a bit of weakness from the Euro as it could well be short lived.
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