Central Bank of Cyprus Governor Christodoulos Patsalides is warning of a prolonged period of high prices. He expressed concern over the growing risks surrounding the inflation outlook and the intensifying uncertainty in the international economic environment. At the same time, he stresses that strict adherence to prudent fiscal and economic policies is the main line of defence for protecting the Cypriot economy and households from the corrosive effects of persistent inflationary pressures.
In a written statement, he commented on the decision of the Governing Council of the European Central Bank (ECB), of which he is a member, to keep interest rates unchanged. He notes that ongoing geopolitical tensions and the resulting energy shock continue to intensify inflationary pressures, while the inflation outlook points to a prolonged period of elevated price growth.
Euro area inflation rose significantly to 3.8% in September, from 3.2% in August, mainly due to a further increase in the prices of petroleum products, he notes. At the same time, he adds, the tightening of financial conditions is partly helping to contain the spread of inflationary pressures from energy to the rest of the economy.
So far, he acknowledges, the indirect effects of the energy shock remain relatively limited. There are still no substantial second-round inflationary effects, as the latest developments in wage growth indicators also show.
Cypriot economy remains resilient
As regards the Cypriot economy, he states that it continues to show remarkable resilience despite heightened geopolitical uncertainty. This is supported mainly by strong domestic demand, favourable labour market conditions and sound public finances.
Inflation and core inflation in Cyprus
Inflation remained at the high level of 5.2% in September, mainly due to significant increases in the prices of energy (21%) and services (7.1%).
“However, the easing of core inflation, which excludes energy and food prices, to 3.9% in September from 4.5% in August, points to a weakening of underlying inflationary pressures. Nevertheless, risks to the inflation outlook remain tilted to the upside, making it necessary to maintain heightened vigilance and to monitor developments closely,” he stresses.
Resilience as a shield
When inflationary pressures persist, he underlines, economic resilience becomes a factor of decisive importance. It acts as a real shield against the cumulative effects of price increases and helps sustain the country’s growth momentum.
According to the governor, the strong labour market and high employment are supporting household disposable income, allowing private consumption to remain a significant driver of growth.
“A resilient economy ensures a steady flow of tax revenue, giving the state the necessary fiscal flexibility to take targeted measures to support vulnerable groups without placing an excessive burden on public finances,” he points out.
He also states that the economy’s resilience is further strengthened by the particularly positive performance of the banking sector, as seen in its high levels of capital adequacy and liquidity.
“The broadening of the economy’s productive base, led by dynamic sectors such as information and communications technologies, strengthens the economy’s ability to absorb external shocks and to offset the pressures on sectors most affected by high inflation,” he says.
“In an environment of global challenges, faithful adherence to prudent economic policies is the only way to shield the economy from the erosion caused by inflation,” he stresses.
