Cyprus' economic outlook remains under pressure from heightened geopolitical uncertainty, with risks to growth tilted to the downside and risks to inflation moving higher, according to Central Bank Governor Christodoulos Patsalides.
Commenting on the European Central Bank's decision on Thursday to leave interest rates unchanged, Patsalides said the broader effects of the energy crisis have so far remained limited but warned that prolonged instability in the Middle East could intensify economic pressures.
"The risks to inflation remain on the upside, while the risks to growth continue to be on the downside," he said, noting that higher energy prices are increasing production costs and could become more persistent if the regional conflict continues.
Growth outlook revised lower
In its June 2026 Economic Bulletin, published on 1 July, the Central Bank said ongoing tensions in the Middle East and the sharp rise in global oil prices are expected to negatively affect Cyprus through weaker domestic and external demand.
The impact is expected to be particularly evident in sectors such as tourism, shipping, construction and real estate, all of which are heavily dependent on foreign investment.
The Central Bank forecasts economic growth of 2.5% in 2026, down from 3.8% in 2025. Growth is then expected to accelerate to 2.9% in 2027 and 3.1% in 2028.
Compared with its March forecasts, the bank revised 2026 and 2027 growth projections down by 0.2 and 0.1 percentage points, respectively, largely because of the war in the Middle East.
Inflation expected to jump
Inflation, measured by the Harmonised Index of Consumer Prices, is projected to rise sharply to 3.2% in 2026, compared with 0.8% in 2025.
The Central Bank attributed the increase mainly to the economic consequences of the Middle East conflict and revised its 2026 inflation forecast upward by 0.5 percentage points compared with March.
ECB keeps rates unchanged
The ECB left its three key interest rates unchanged on Thursday, while warning that the full inflationary impact of the recent energy shock has yet to materialise.
The deposit facility rate remains at 2.25%, the main refinancing rate at 2.40%, and the marginal lending facility rate at 2.65%.
The ECB said it remains ready to adjust its policy tools if necessary to ensure inflation returns to its 2% medium-term target and to safeguard the smooth transmission of monetary policy.
