Cyprus cuts rates before eurozone entry in 2008

NICOSIA – Cyprus’s central bank unexpectedly decided yesterday to cut its key refinancing rate by 50 basis points to match the ECB’s 4 percent level. The bank flexed its muscles at commercial banks in a spat over rates on existing credit. It is the first refi rate cut in more than a year and is a clear signal to commercial banks that they must cut their base rates in line with those of the European Central Bank when the island joins the eurozone in 10 days’ time. «There were some doubts as to how the conversion would work on existing loans, so we decided to clarify that,» the central bank governor, Athanassios Orphanidis, said after an unscheduled meeting of the rate-setting monetary policy committee yesterday. «Reading some press reports in recent days, we realized that not everyone was as sure as we were as to the correct interpretation of the law,» Orphanidis said. «I was puzzled by this.» Confusion There was supposed to be a seamless automatic transition from Cypriot rates to European Central Bank rates on January 1 but confusion among commercial banks on the interest rates to apply on existing credit contracts when the island switches currencies meant the country’s central bank has opted for a formal rate change now. There have been reports that commercial banks disagreed that a drop in the refinancing rate should also mean a drop in their base rates. The island’s central bank had actually kept rates unchanged at its a regular meeting on December 10. The Cypriot central bank also said its Lombard rate and overnight deposit facility would stay unchanged at 5 and 3 percent, respectively.