Nicosia endorses ECB policy

NICOSIA (Reuters) – European Central Bank monetary policy is sensible under the present circumstances although eurozone growth forecasts could be revised lower if US financial turmoil deepens, Cyprus’s finance minister said yesterday. «The eurozone had shown amazing resilience to what is happening initially. But if it goes on and is deeper than most people think, then certainly there are risks to eurozone growth projections and there is a likelihood they will be adjusted downward,» Finance Minister Charilaos Stavrakis told Reuters in an interview. The ECB has kept interest rates on hold at 4.0 percent since last June and has resisted calls to consider rate cuts as a means of halting slowdown risks. French ministers have been particularly critical in the past but less so in recent months as eurozone inflation hit an all-time peak of 3.6 percent in March before easing to 3.3 percent in April. «It is a sensible policy given present circumstances,» Stavrakis said. While acknowledging inflation was a concern, Stavrakis said it could not be isolated. «We should not ignore other equally important economic variables like economic growth. You cannot just focus on inflation and ignore everything else,» he said. The European Commission has forecast eurozone growth will slow to 1.7 percent this year from 2.6 percent in 2007. The euro, which has risen strongly in recent months, will eventually reach its normal equilibrium against the dollar, Stavrakis said, adding that economic fundamentals would prevail in the long term. Cyprus economy In Cyprus, which joined the eurozone in 2008, inflation was running at 4.3 percent in April. The introduction of the euro on January 1 added between 0.2 and 0.3 percentage points to CPI, though recent surges in the price of crude represented about 50 percent of the recent spike, Stavrakis said. He said he expected inflation to moderate to «slightly less» than 4.0 percent for the year, compared to 2.2 percent in 2007. The government preferred to adopt «targeted policies» to help those in need rather than state subsidies, which could inhibit the functioning of the market. Economic growth was expected to decelerate from last year’s 4.4 percent to a central forecast of 3.75 percent. «There is a natural deceleration caused by a slowdown in the global economy,» Stavrakis said. Cyprus has been largely absent from the international bond markets for several years, redeeming its public debt with fiscal surpluses which reached 3.3 percent of gross domestic product in 2007 and is scheduled to fall to 0.5 percent in 2008. The republic had no specific plans to tap the bond markets this year. «Right now the spreads are not attractive even for good-rated countries like Cyprus,» he said. «But certainly at some point, once spreads reach more normal levels, we may be tempted to go with a jumbo deal to create quite a lot of liquidity on the Cyprus paper.» Stavrakis, a banker who was appointed by Cyprus’s communist-led government which won elections in February, said the administration was not dogmatic about privatizations. The prospect of large corporations like the state-owned electricity and telecom companies being privatized was minimal, he said. But he said the administration could not rule out smaller privatizations, including the Cyprus bourse, which is now a semi-government organization. «There is some thought of privatizations of other state companies or assets which have less strategic importance to the economy… a classic case could be the Cyprus Stock Exchange,» he said.