The Central Bank of Cyprus proceeded on Friday in its June 2026 projections, with a downward revision of the GDP growth rate by 0.2, to 2.5%, and by 0.1 p.p. to 2.9% for the years 2026 and 2027, respectively, mainly due to the continuation of the war in the Middle East.
Furthermore, the CBC now expects that in 2026 unemployment will increase by 0.1 percentage points, to 4.6%, inflation will soar by 0.5 percentage points, to 3.2%, while core inflation (excluding volatile energy and food prices) will rise to 2.3%, as was the projection last March.
Specifically, in its projections for the main macroeconomic indicators of Cyprus for the years 2026-2028, published on Friday, the CBC notes that its baseline scenario "assumes that the conflict will last until the last quarter of 2026, followed by a gradual de-escalation," and adds that "the balance of risks to the baseline scenario for the period 2026–2028 is assessed as being tilted to the downside for GDP and to the upside for inflation."
CBC notes that "the medium-term effects on the Cypriot economy will depend on the duration and intensity of the conflict."
Additionally, it states that risks arise from climate change (extreme weather events, green taxes) and from potential wage increases and profit margins beyond expectations.
Specifically, the CBC now expects the GDP growth rate for 2026 to slow to 2.5%, compared to 3.8% for 2025, while for the years 2027 and 2028, the GDP growth rate is expected to accelerate to 2.9% (up from 3.0% that was expected last March) and 3.1%, respectively.
Compared to the March 2026 projections, there is a downward revision of the GDP growth rate by 0.2 and 0.1 percentage points for the years 2026 and 2027, respectively, mainly due to the continuation of the war in the Middle East.
The relatively limited impact for 2026, compared to the March projections, as the CBC emphasizes, "is attributed to the fact that some conservative assumptions regarding the effects of the war had already been incorporated in the previous forecasting round." At the same time, in the June 2026 projections, a longer duration of the conflict is adopted.
According to the CBC, domestic demand for the years 2026-28 is expected to be supported by the continuing positive trend of private consumption due to the increase in real disposable income of households despite increased inflationary pressures, as well as the resilience that the labor market continues to exhibit, despite the aforementioned shocks.
Furthermore, it states that despite the pressures exerted by geopolitical uncertainty on investment activity, a substantial strengthening of domestic demand is expected from the ongoing large private non-residential investments. "Although their implementation timelines may be affected by the Middle East crisis, these projects are not expected to be cancelled, given the temporary nature of geopolitical instability and their long-term completion horizon," it notes.
Unemployment
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Moreover, according to the CBC, the labour market continues to support the Cypriot economy and to exhibit significant resilience. The CBC projects unemployment to rise slightly to 4.6% in 2026 due to the negative impact of the crisis in the Middle East, which is mitigated by tightness in the labor market.
For the period 2027-28, the CBC expects unemployment to stabilise at 4.5%, within the framework of GDP recovery.
Compared to the March 2026 projections, a slight upward revision in the unemployment rate for 2026 is expected by 0.1 percentage points, due to lower GDP estimates.
Inflation
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According to the CBC, in 2026 inflation (based on the Harmonized Index of Consumer Prices) is expected to rise significantly to 3.2% from 0.8% in 2025 mainly due to the economic impacts of the war in the Middle East. Specifically, significant upward pressures are expected on energy prices due to increases in international oil prices, due to the restriction of transit through the Strait of Hormuz, with indirect upward effects on the other subcategories of inflation.
"Additional upward pressures are expected in the prices of non-energy industrial goods, which, although still experiencing disinflationary pressures, are expected to do so to a lesser extent than in 2025," it adds.
According to the CBC, in 2027 and 2028 inflation is expected to decline to 1.9%, mainly due to the expected downward base effect on energy prices, as well as the gradual slowdown in service prices and, to a lesser extent, food prices.
It notes that inflation in 2028 includes the impact on energy prices (fuels) from the expected introduction of the expanded EU Emissions Trading System (ETS2).
Compared to the March 2026 projections, there is an upward revision of inflation by 0.5 percentage points for 2026, due to the economic impacts of the war in the Middle East. "The downward revision for 2028 by 0.3 percentage points is attributed to expected lower energy inflation due to the projected decline in oil prices from 2027 onwards," the Central Bank of Cyprus says.
Core inflation
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Furthermore, core inflation, according to the CBC, is expected to rise to 2.3% in 2026 compared to 1.9% in 2025. "This rise is due to higher expected inflation in services and in non-energy industrial goods prices, driven by indirect effects from higher energy inflation," it adds.
In the years 2027-2028, core inflation is expected to decline to 2.2% and 1.9%, respectively, reflecting, as the CBC notes, the expected gradual slowdown in service inflation, which is partially offset by the return of prices of industrial products excluding energy to positive territory.
Compared to the March 2026 projections, the upward revision of core inflation by 0.2 percentage points for the year 2027 is attributed to the effects of the war in the Middle East, while no revision is recorded for the years 2026 and 2028.
CNA/CST/MCH/EPH/2026
ENDS, CYPRUS NEWS AGENCY
