Government mulling new relief measures

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The government will introduce more measures to fence off the effects of persisting high inflation following news that interest rates will rise after the latest increase imposed by the European Central Bank.

The ECB’s decision on Thursday to increase its benchmark policy rate by another 25 basis points to its highest level in 22 years came as it raised its inflation forecast and trimmed its growth prediction for the next three years.

This was the eighth time the ECB increased interest rates from July 27 2022, pushing its key interest rates up by a cumulative 375 basis points, with the deposit rate reaching 3.5% and the main refinancing rate at 4%.

With inflationary pressures remaining, the head of the European Central Bank, Christine Lagarde, made it clear the cessation of interest rate increases is not in the bank’s immediate plans.

Eurozone inflation slowed to 6.1% in May from 7% in April, although still short of the ECB’s 2% target.

In Cyprus, the Cabinet approved a bill that includes new products and services for reduced VAT rates.

The bill includes theatrical, musical, and dance performances, waste collection, waste and sewage treatment, and the delivery of books, wheelchairs, orthopaedic devices and items for the personal use of people with hearing and sight problems and other disabilities.

Government spokesman Konstantinos Letymbiotis said the measures are not expected to disturb the prudent fiscal policy, as their fiscal cost amounts to approximately €3.5 mln per year.

These services carry a 19% VAT, but it was not immediately made clear to what extent the rate would be lowered.

Earlier in May, the government decided to waive VAT on items, including milk, nappies, and bread, after the prices of essential products skyrocketed.

A list of 1,775 items will carry a 0% VAT until the end of October this year.

The Finance Ministry is also working on 0% VAT list additions.

It will suggest adding consumer goods such as rice, pasta, olive oil and legumes, for which the European Commission allows states to reduce VAT.

The products currently carry a reduced 5% VAT instead of 19%.

Fuel tax

Asked whether the government would reconsider a decision to lift a freeze on consumer tax on fuel and a state subsidy on electricity bills set to expire at the end of June, Letymbiotis said authorities would be monitoring developments.

The relief measures introduced to buffer hiking inflation expire on July 1, which will see fuel prices shoot up by eight cents per litre, and a €68.72 discount on electricity bills scrapped.

He noted the government was prompted to re-evaluate the specific measures following the reduction in energy prices.

Letymbiotis argued that for the government, the issue is not political but a question of social sensitivity and fiscal discipline.

“What the government is looking at right now is whether the reasons which prompted authorities to introduce those measures are still valid today.

“The government will continue to maintain fiscal sobriety and introduce targeted support measures for vulnerable households and our fellow citizens”.

Meanwhile, the Cyprus Consumers’ Association called on the government to maintain the state subsidy for reduced electricity prices, arguing that revenue from the reintroduction of the consumption tax on fuel should go to vulnerable groups.