jean - claude trichet : the successful entry of cyprus into the euro area speech by mr jean - claude trichet, president of the european central bank, at the conference “ welcoming cyprus to the euro area ”, nicosia, 18 january 2008. * * * ladies and gentlemen, it is a great pleasure for me to attend this conference celebrating your adoption of the euro. let me first congratulate all parties involved in the successful cash changeover that took place at the beginning of the year. it has been going smoothly. none of this would have been possible without the excellent performance of the cypriot economy during the convergence process. 1. cyprus ’ s economic achievements on the way to the euro 1 today ’ s euro celebrations are the result of the successful macroeconomic policies that the cypriot authorities have pursued in recent years. cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well - managed monetary and exchange rate policies combined with a range of structural reforms. in the last decade, hicp inflation in cyprus has been contained, averaging 2. 2 % in 2007, with the only exceptions being in 2000 and 2003, when inflation rose mainly because of increases in energy prices as well as vat harmonisation. short - term as well as long - term interest rates have followed a declining trend in recent years to levels in line with those of the euro area as a whole. this suggests that market participants have confidence in cyprus ’ s macroeconomic and fiscal developments as well as in its monetary and exchange rate policies. the process of nominal convergence has been accompanied by robust economic growth. real gdp growth in cyprus has been well above that in the euro area in recent years. real output growth has been underpinned by domestic demand, and in particular by strong private consumption and, importantly, by strong fixed capital formation. cyprus ’ s gdp per capita ( in ppp terms ) progressed from around 74 % of the 1996 average of the 12 countries which initially joined the euro area to around 84 % in 2006 : this is a significant improvement, and may it continue that way. in spite of its remarkable progress towards nominal and real convergence, cyprus has not experienced major imbalances : price and cost competitiveness developments have been favourable since 2004. the fiscal balance ( the deficit - to - gdp ratio ) has been improving since 2004 and stood at - 1. 2 % of gdp in 2006. looking at the financial side, cyprus is experiencing substantial financial deepening, which has been

conditioning assumptions, not just forward interest rates, and any of these can change. our understanding of the economy evolves over time and the economy itself is always subject to unforeseeable shocks. empirically, the behaviour of the economy matters more for interest rates than prior forecasts. in addition, the mpc isn ’ t solely concerned with inflation anyway, still less its most likely rate at a fixed point in the future. that means that the target horizon for inflation is generally longer than the earliest point at which policy can affect it – there is therefore no single, unique path of interest rates that will do the job. it also means that the horizon itself can vary. i will therefore conclude with something of an apology. for those in the audience wanting me to give a direct and unequivocal promise as to when bank rate will change, you will, i ’ m afraid, be disappointed. i can ’ t. but you should look on the bright side. if there is any value in listening to people like me, it is to help you with what is the best way to try and predict future interest rates - to forecast the economy yourselves ( which is probably more interesting ). after all, if the future were perfectly predictable we wouldn ’ t have to bother trying. references broadbent ben, 2014, “ unemployment and the conduct of monetary policy in the uk ”, speech given at the federal reserve bank of kansas city 38th economic symposium, jackson hole, wyoming. campbell john, 1995, “ some lessons from the yield curve ”, journal of economic perspective, vol. 9, no. 3. eguren - martin f. and n. mclaren, 2015, “ how much do uk market interest rates respond to macroeconomic data news? ”, bank of england quarterly bulletin. gabaix xavier 2012, “ variable rare disasters : an exactly solved framework for ten puzzles in macro - finance ”, quarterly journal of economics, volume 127, issue 2, pp. 645 – 700. joyce m. and a. meldrum, 2008, “ market expectations of future bank rate ”, bank of england quarterly bulletin. macaulay frederick, 1938, “ some theoretical problems suggested by the movements of interest rates, bond yields, and stock prices in the united states since 1856 ”, national bureau of economic research, pp. 33. mankiw g., and l. summers, 1984, “ do long - term interest rates overreact to short - term interest