Central Bank cuts Cyprus growth forecast as Middle East conflict weighs on economy
The Central Bank of Cyprus expects GDP growth of 2.9 per cent in 2026, down from 3.8 per cent this year, while inflation is set to jump to 3.3 per cent.
The Central Bank of Cyprus (CBC) expects economic growth to slow in 2026 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.
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, including higher international oil prices, elevated refining margins and increased geopolitical uncertainty, which are expected to hit Cyprus mainly through energy prices, tourism and non-residential private investment.
The baseline scenario assumes the conflict will continue 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 throughout the forecast period. Private consumption should remain positive as households benefit from higher real disposable incomes, while large residential and non-residential investment projects are not expected to be cancelled given their long completion horizons.
Net exports, however, are expected to make a negative contribution to growth in 2026, mainly because of weaker exports following a decline in tourism revenue during the first half of the year. The picture is expected to improve in 2027 and 2028, when net exports are projected to contribute positively to growth, mainly because of a further recovery in tourism.
Unemployment falls to historic low
The labour market is expected to remain one of the main sources of resilience, with unemployment forecast to fall to 3.8 per cent in 2026 and stay 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 has significantly lowered its unemployment forecasts compared with June.
Inflation expected to reach 3.3 per cent
The most significant deterioration in the outlook 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, which are also expected to feed into services and food prices. Inflation is expected to ease to 2.4 per cent in 2027 and 1.9 per cent in 2028 as energy inflation subsides.
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. The 2028 forecast also incorporates the expected implementation of the EU’s expanded Emissions Trading System, known as ETS2, which is expected to have its main impact on transport fuel.
What it means for residents
Slower growth and higher inflation mean households should expect the cost of everyday essentials, especially electricity, fuel and food, to remain under pressure through 2026. The labour market remains tight, which supports job security and wages, but real incomes will be squeezed by rising prices.
- Household budgets: Energy and food costs are set to rise faster than overall prices, so it is worth reviewing electricity and fuel spending and taking advantage of the existing VAT and excise measures.
- Jobs and wages: Unemployment at a historic low of 3.8 per cent means the labour market is strong, but pay increases may not keep pace with inflation in the short term.
- Big projects: Large construction and infrastructure works are expected to continue despite uncertainty, supporting local employment and supplier demand.
This text is written from the source article and is not a translation of it.
