Cyprus keeps key rate put, eyes lower euro differential

NICOSIA – Cyprus kept its interest rates on hold yesterday after a 25-basis point hike by the European Central Bank temporarily eased the pressure on local authorities to cut the gap between domestic and eurozone rates. The key refinancing rate will remain steady at 3.25 percent, though a minority – one of the six present monetary policy committee (MPC) members – advocated a drop. «It was a five-to-one decision,» the central bank governor, Christodoulos Christodoulou, told Reuters, adding that the dissenting member had sought a 25 basis point cut. He declined further details, and the central bank does not issue minutes of MPC discussions as a matter of policy. «We made particular note of the fact that the ECB increased its interest rates, narrowing the margin between European and domestic rates,» Christodoulou said. It is the third meeting in succession where policymakers have disagreed on rates. In inflation-fueled September and October reviews a minority – albeit higher than yesterday’s ratio – wanted a 25-basis point cut. Christodoulou recently disclosed that he had wanted a rate cut in September, but was outvoted. News from the inflationary front was encouraging, as consumer prices fell back to 2.8 percent year-on-year in November from an October reading of 3.08 percent, Christodoulou said. Domestic markets had not been anticipating an adjustment during the scheduled review, which came a day after the ECB jacked up its rates for the first time in five years, to 2.25 percent. «The ECB raised its rates by 25 basis points yesterday so there was no reason for them to move,» said a dealer in a local commercial bank. «Pressure on the pound has also eased because of the winter season and slackening of demand from tourists,» the dealer said. A rampant Cyprus pound trading at its upper 2.25 percent fluctuation limit against the euro was one of the reasons cited by the central bank at its last 50-basis point rate reduction in June. Cyprus, a member of the ERM 2 currency stabilization grid since last April, wants to keep the lid on excessive volatility surges as it prepares to join the eurozone by 2008. By then, Cyprus is expected to have phased out the differential with euro rates. «The difference has to be eliminated, it could be either through us cutting rates, the ECB raising them, or a combination of both,» Christodoulou said.