Cyprus holding rates

NICOSIA (Reuters) – Cyprus kept the key refinancing rate unchanged at 4.5 percent yesterday, deferring its compulsory alignment with lower eurozone rates until December. With the European Central Bank expected to keep its main interest rate at 4.0 percent into next year, Cyprus must either cut its borrowing costs by 50 basis points when its central bank meets on December 10, or slip into ECB rates by default when the island adopts the euro on January 1. «We will decide how to do it at our next meeting,» Athanassios Orphanides, Cyprus’s central bank governor, told reporters. «It really doesn’t make much of a difference to Cyprus if we change (rates) on the day of the meeting or wait until the end of the year… A three-week time frame will not make much difference,» he said after a meeting of the rate-setting Monetary Policy Committee (MPC). Cyprus has not changed its rates for more than a year. The ECB had been expected to raise eurozone rates toward the Cyprus level until turmoil broke out on global financial markets in August, forcing the ECB to suspend its tightening campaign. The Cyprus Lombard rate will stay at 5.0 percent and the overnight deposit facility rate at 3.0 percent, said Orphanides, who will join the ECB’s governing council in January. Financial markets had not expected any change. «(The central bank) wants to keep rates as high as possible for as long as possible,» said economist Marios Mavrides. «However, even if they reduced them now, it would make no difference. For Cyprus, the current Cyprus interest rates are no longer relevant, but those of the ECB are.» The central bank is worried that excessive credit is feeding into inflation and stoking property prices. Consumer prices rose 2.99 percent year-on-year in October, up from 2.6 in September. In the past year home prices have increased more than 10 percent. Authorities asked commercial banks to limit mortgage lending earlier this year. «If loans continue at the same pace, the rate of growth in credit will exceed 40 percent by the end of the year,» said Orphanides. «However I do not think the same rapid expansion rates will continue.»