Source: cyprus-mail.com
Large private infrastructure investments and rising exports are expected to provide a significant boost to Cyprus’ economic activity between 2026 and 2028, according to Central Bank of Cyprus (CBC) governor Christodoulos Patsalides.
The governor’s comments were included in the central bank’s annual report for 2025, which highlighted that the Cypriot economy continues to show positive prospects despite a constantly shifting international environment, including the war in the Middle East.
“Based on the working assumption of the baseline scenario for a gradual de-escalation of the war, inflation is expected to be close to 2 per cent in the medium term, contributing to maintaining a stable macroeconomic framework capable of supporting sustainable and balanced growth,” the report stated.
Referring to the CBC’s March 2026 projections, which incorporate the impact of the Middle East conflict and the outbreak of foot-and-mouth disease in Cyprus, the governor said growth is expected to slow to 2.7 per cent in 2026 from 3.8 per cent in 2025, before accelerating to 2.9 per cent in 2027 and 3.1 per cent in 2028.
He added that domestic demand is expected to strengthen during 2026 to 2028, supported by rising private consumption driven by higher real disposable income and a resilient labour market, despite weaker consumer confidence linked to the war.
“A significant boost to economic activity is also expected from large private investments in infrastructure, as well as from the rise in exports, mainly in technological, financial and professional services,” the governor said.
Regarding tourism, Patsalides stated that the sector is expected to be negatively affected in 2026 but recover from 2027 onwards.
He further stated that inflation is projected to rise to 2.7 per cent in 2026, mainly due to higher energy prices, supply chain disruptions and increased global prices of fertilisers and food.
Inflation is then expected to ease to 2 per cent in 2027, supported by lower energy and services prices, before rising slightly to 2.2 per cent in 2028, largely due to the implementation of the expanded Emissions Trading System (ETS2), which is expected to increase fuel costs.
Turning to the banking sector, the governor said it maintained high resilience in 2025, with strong solvency and liquidity indicators.
“The sector maintained high resilience,” the governor said.
He also pointed out that the non-performing loans ratio fell to 1.6 per cent at the end of December 2025, below the European Union average of 1.8 per cent.
Regarding the central bank itself, Patsalides stressed its continued commitment to its core mandate.
“The central bank remains fully committed to its mission of ensuring price stability and financial stability,” he said.
Within this framework, he added that the bank will continue to modernise its institutional structure.
“The bank will continue to invest in its institutional modernisation and in strengthening its presence and contribution both in Cyprus and in the euro area, enhancing the effectiveness of its operations and contributing to the stability of the Cypriot economy and the resilience of the European economy,” he said.
Patsalides also referred to a proposal submitted to the President of the Republic and the Finance Minister to modernise the bank’s governance model.
“The objective is the adoption of a lean and collective governance model, fully aligned with European best practices,” he said.
“This initiative constitutes a substantial investment in strengthening the institutional resilience and operational effectiveness of the bank, ensuring that the CBC will continue to operate as a stable pillar of the Cypriot economy and a reliable partner in the Eurosystem,” he added.
The CBC report further mentioned that the economy remains on a strong growth trajectory, supported by a broad range of sectors.
“Gross domestic product continued to record high growth rates, supported by a wide range of sectors of economic activity,” the report stated.
It also highlighted that the labour market remains resilient, while inflation remained low in 2025 and rose to levels consistent with the medium-term target at the beginning of 2026.
The positive outlook is also reflected in public finances, with public debt falling below 60 per cent of GDP and Cyprus’ credit rating upgraded by international agencies.
According to the report, economic growth in 2025 was driven mainly by private consumption and both public and private investment.
“Economic growth stemmed mainly from the increase in private consumption and investments, both public and private,” the report said.
Looking ahead, the CBC expects GDP growth to remain positive over the coming years, driven largely by continued increases in domestic demand.
Unemployment is projected to stabilise at around 4.5 per cent between 2026 and 2028, reflecting tight labour market conditions consistent with full employment.
The report also highlighted that inflationary pressures in 2026 will be influenced by higher energy prices linked to rising global oil prices, as well as indirect effects on other components.
Additional upward pressures are expected from food prices, due to the outbreak of foot-and-mouth disease and rising prices of meat and dairy products, as well as higher fertiliser costs linked to the Middle East conflict.
What is more, core inflation is projected to rise to 2.3 per cent in 2026 from 1.9 per cent in 2025, mainly due to the war’s impact.
For 2027 and 2028, core inflation is expected to stabilise at around 2 per cent, reflecting a gradual slowdown in services inflation offset by easing deflationary pressures in industrial goods excluding energy.