Central Bank of Cyprus cuts growth outlook as Middle East conflict weighs on economy
The CBC now expects GDP growth of 2.9 per cent in 2026, down from 3.8 per cent in 2025, while inflation is projected to jump to 3.3 per cent.
The Central Bank of Cyprus (CBC) expects economic growth to slow this year as the Middle East conflict weighs on tourism and investment, while inflation is projected to rise sharply, according to its September forecasts released on Thursday, as reported by Cyprus Mail.
The CBC projected GDP growth of 2.9 per cent in 2026, down from 3.8 per cent in 2025, before growth accelerates to 3.1 per cent in both 2027 and 2028. The projections incorporate the economic effects of the ongoing conflict in the Middle East, including higher international oil prices, elevated refining margins and increased geopolitical uncertainty, which are expected to hit energy prices, tourism and non-residential private investment. The baseline scenario assumes the conflict continues until the final quarter of 2026, followed by a gradual de-escalation.
Despite the external shocks, the CBC said the economy has continued to show resilience, with domestic demand expected to support growth. Private consumption is expected to remain positive as households benefit from higher real disposable incomes, while large residential and non-residential investment projects are expected to continue despite the geopolitical uncertainty. Net exports, however, are expected to make a negative contribution to growth in 2026 because of weaker tourism revenue in the first half of the year, before improving in 2027 and 2028.
Unemployment falls to historic low
The labour market is expected to remain a key source of resilience, with unemployment forecast to fall to 3.8 per cent in 2026 and remain at that level in both 2027 and 2028. “The historically low unemployment rate demonstrates the expansion of the economy's productive capacity,” the CBC stated. The central bank lowered its unemployment forecasts compared with June by 0.8 percentage points for 2026 and 0.7 percentage points for both 2027 and 2028.
Inflation expected to reach 3.3 per cent
The most significant deterioration concerns inflation, with the Harmonised Index of Consumer Prices forecast to rise to 3.3 per cent in 2026, compared with just 0.8 per cent in 2025. The CBC attributed the increase primarily to higher energy prices and elevated refining margins linked to the Middle East conflict, with pressures also feeding into services and food prices. The forecasts incorporate existing government measures intended to mitigate the impact of higher prices, including VAT reductions on electricity and the extension of reduced fuel excise duties. Inflation is expected to ease to 2.4 per cent in 2027 and 1.9 per cent in 2028.
The CBC also upgraded its growth forecasts compared with June, raising its 2026 projection by 0.4 percentage points and its 2027 projection by 0.2 percentage points, citing better-than-expected tourism developments and strong residential investment, as well as an expected strengthening of public investment through higher defence spending under the European SAFE programme.
What it means for residents
Slower growth and faster inflation mean household budgets will feel tighter over the next year, even as the job market remains strong. Energy, food and services are all expected to cost more, and the CBC's own figures show price pressures spreading beyond fuel.
- Watch your energy bills. The VAT cut on electricity and reduced fuel excise duties are already factored into these forecasts, so any further relief depends on government decisions later in the year.
- Plan for higher everyday costs. Food and services prices are expected to keep rising through 2026, which matters for anyone on a fixed income or renting.
- Jobs remain secure for now. Unemployment at 3.8 per cent is a historic low, so the risk of losing work is lower than in previous downturns, but wage growth may lag behind prices.
This text is written from the source article and is not a translation of it.
