The decision to increase key interest rates by 0.25%, following yesterday’s meeting of the Governing Council of the European Central Bank (ECB), is deemed “necessary,” according to a written statement by the Governor of the Central Bank of Cyprus (CBC), Christodoulos Patsalides on Friday.
In the statement published by the CBC, Patsalides refers to the effects of the conflict in the Middle East, explaining that updated estimates led to the decision to raise the key interest rates.
“As the initial scenario analysis at the outset of the crisis in the Middle East indicated, a prolonged conflict would intensify inflationary pressures, shifting upwards the baseline inflation outlook,” he notes, adding that “six months into the conflict, this assessment is now confirmed by the latest data.”
He also points out that the inflation outlook continues to be shaped to a large extent by the energy shock. “Moreover, upward revisions to our economic growth projections reinforce a higher baseline trajectory for inflation,” he adds.
“The updated baseline scenario for September points to a prolonged period of elevated inflation,” Patsalides continues, underlining that “this occurs occurs despite the tightening of financial conditions, which stems from the increase in key interest rates in June and the rise in long-term bond yields.”
He further explains that “after assessing the latest data and the alternative scenarios (baseline, mild, adverse and severe), we concluded that a 25-basis-point increase in the key interest rates was warranted.”
He also notes that “nomaterial signs of second-round inflationary pressures, as demonstrated by the latest indicators regarding wage trends” and that “inflation expectations, as reflected in international financial markets and survey-based indicators, remain under control.”
“As a result, the ECB remains well positioned to manage the current uncertainty and is determined to ensure that inflation stabilises at our 2% target in the medium term,” the Central Bank of Cyprus Governor continues.
Regarding the Cypriot economy, Patsalides notes that it continues to demonstrate resilience, supported mainly by the momentum of the services sector, strong private consumption, robust labour market and sound public finances.
“Against this backdrop, inflationary pressures have intensified in recent months, with inflation rising to 5.2% in August 2026, from 4.4% in July,” he states, adding that “this increase is mainly due to the prices of services and energy, with services remaining the largest component of inflation.”
“These developments reflect strong demand conditions, both domestically and through the tourism sector, as well as the pass-through of higher energy costs to electricity and transportation prices,” Patsalides says, adding that “after 2026, inflation is expected to gradually moderate as external price pressures fade. However, the risks to the inflation outlook remain tilted to the upside.”