Cyprus’s central bank cut interest rates by a quarter percentage point on Friday in an unexpected move that dealers saw as a possible testing of the waters on gradual convergence with eurozone rates.
The cut took the key lending rate in the new European Union member to 5.25 per cent and the deposit rate to 3.25 per cent, reducing the gap with eurozone which Cyprus wants to join in 2007.
“We noted lower inflationary pressures and an improvement in the fiscal situation,” Central Bank Governor Christodoulos Christodoulou told.
Dealers had not expected a rate change at Friday’s meeting of the bank’s Monetary Policy Committee.
The market generally believed Cyprus would not tamper with rates in the run-up to joining the ERM-2 mechanism.Cyprus is expected to join ERM-2, a currency stabilization system, in the first quarter of 2005. But rates needed to move at some stage toward levels in the the eurozone rate, where the key rate is now 2 per cent.
