The Cyprus economy continues to show resilience despite heightened geopolitical uncertainty and renewed inflationary pressures, according to Central Bank Governor Christodoulos Patsalides.
Commenting on the European Central Bank's decision to raise interest rates by 25 basis points, Patsalides described the move as necessary in light of rising inflation and persistent risks linked to the energy market and the conflict in the Middle East.
ECB sees inflation staying elevated
Patsalides said the ECB's latest assessment confirms earlier concerns that a prolonged conflict in the Middle East would intensify inflationary pressures and push inflation forecasts higher.
According to the updated ECB outlook, inflation is expected to remain elevated for an extended period, driven largely by higher energy costs and stronger-than-expected economic growth.
The governor said the ECB decided to raise rates by 0.25 percentage points after reviewing new economic data and a range of inflation scenarios.
Inflation rises to 5.2%
In Cyprus, inflation increased to 5.2% in August 2026, up from 4.4% in July.
Patsalides said the rise was driven primarily by higher prices in:
- Services
- Energy
Services remain the largest contributor to inflation, reflecting strong domestic demand, tourism activity and the pass-through of higher energy costs into electricity and transport prices.
No significant wage-driven inflation
The governor noted that the ECB has not observed significant secondary inflationary effects from wages.
He added that inflation expectations among businesses, households and financial markets remain broadly anchored, allowing the ECB to continue pursuing its medium-term goal of returning inflation to 2%.
Economy supported by services and consumption
Despite these challenges, Patsalides said the Cypriot economy remains supported by:
- A strong services sector.
- Robust private consumption.
- A healthy labour market.
- Sound public finances.
He said these factors have helped Cyprus maintain economic resilience amid a challenging international environment.
Inflation expected to ease gradually
Looking beyond 2026, Patsalides said inflation is expected to decline gradually as external price pressures weaken.
However, he warned that risks to the inflation outlook remain tilted to the upside, particularly given ongoing geopolitical uncertainty and developments in global energy markets.
