Central Bank of Cyprus Governor Christodoulos Patsalides has warned that prolonged energy pressures are increasing inflation risks and threatening the economic outlook, calling for continued vigilance as Cyprus faces elevated price growth.
In a statement following the European Central Bank’s (ECB) monetary policy decision on Thursday, October 29, Patsalides said the euro area was facing a longer period of elevated inflation. He added, however, that Cyprus’ economic resilience, sound public finances and strong banking sector were helping the country withstand the impact of rising prices.
“The prolongation of the energy shock, the deterioration in the inflation outlook and the ECB’s commitment” were the defining features of the current situation, he said.
The ECB’s Governing Council decided to keep its three key interest rates unchanged, with the deposit facility rate at 2.50%, the main refinancing rate at 2.65% and the marginal lending facility rate at 2.90%.
The decision followed September’s 0.25 percentage point increase, as conflict in the Middle East continued to push energy prices higher and threaten both inflation and economic growth.
Energy prices drive euro area inflation higher
Patsalides said geopolitical tensions and the resulting energy shock were intensifying price pressures across the euro area.
Inflation rose to 3.8% in September, from 3.2% in August, largely due to higher energy prices, particularly petroleum products.
According to the ECB, energy inflation climbed to 18.9% in September from 14.3% the previous month. Inflation excluding energy also increased, reaching 2.3% from 2.1%.
Services inflation edged up to 3.2%, compared with 3% in August, while food inflation rose to 1.3% from 1.1%.
Diesel and petrol prices also reached new peaks during September, partly reflecting higher refining margins and adding to pressure on households and businesses.
Despite the worsening inflation outlook, Patsalides said tighter financial conditions were helping limit the extent to which higher energy costs were spreading through the wider economy.
This reflected both the impact of previous interest rate increases and a significant rise in long-term government bond yields, amid growing concerns over the sustainability of global public debt.
“So far, the indirect effects of the energy shock have remained relatively limited, while meaningful second-round effects have yet to emerge, as reflected in the latest developments in wage indicators,” he said.
Inflation expectations in international financial markets and relevant surveys also remained broadly contained, particularly over the medium and longer term.
The ECB similarly said underlying inflation had remained broadly stable and wages had not yet shown a significant response to the energy shock. However, it warned that a more severe and prolonged shock could eventually push inflation higher and weigh on economic growth through further price and wage increases.
Patsalides said euro area economic activity had continued to show resilience, although uncertainty and tighter financing conditions were expected to weigh on growth in the period ahead.
The ECB reiterated its commitment to returning inflation to its medium-term target of 2%, stressing that future interest rate decisions would depend on incoming economic and financial data rather than follow a predetermined course.
Cyprus inflation remains elevated at 5.2%
Turning to the domestic economy, Patsalides said Cyprus continued to demonstrate resilience despite heightened geopolitical uncertainty, supported by strong domestic demand, favourable labour market conditions and sound public finances.
Nevertheless, Cyprus inflation remained elevated at 5.2% in September, driven largely by significant increases in energy prices and services costs.
Energy prices rose by 21%, while services inflation reached 7.1%, reflecting persistent pressure in these parts of the domestic price basket.
There were, however, signs that underlying price pressures were beginning to ease. Core inflation, which excludes energy and food, declined to 3.9% in September from 4.5% in August.
Despite this moderation, Patsalides said risks to the inflation outlook remained tilted to the upside, highlighting the need for continued vigilance and close monitoring.
“In an environment of persistent inflationary pressures, economic resilience becomes a factor of critical importance, acting as an essential buffer against the cumulative effects of rising prices and helping preserve the economy’s growth momentum,” he said.
How Cyprus can withstand rising prices
Patsalides identified several factors that could help Cyprus manage the effects of inflation, starting with the strength of the labour market and high employment levels.
These conditions support household disposable incomes and help private consumption remain an important driver of economic activity, even as rising prices put pressure on purchasing power.
Sound public finances also provide an important safeguard. A resilient economy helps maintain stable tax revenues, giving the government room to introduce targeted support for vulnerable groups without putting excessive pressure on public finances.
He also highlighted the banking sector’s strong capital and liquidity positions, which reinforce financial stability and allow banks to continue financing economic activity.
This is particularly important when tighter financing conditions threaten to restrict borrowing and investment, both of which are essential for economic growth.
Another source of strength is the broadening of Cyprus’ productive base, particularly through the development of dynamic sectors such as information and communication technologies.
A more diversified economy is better equipped to absorb external shocks and offset pressure on industries more exposed to inflation, Patsalides said.
He added that the country’s resilience, together with recent sovereign credit-rating upgrades, was strengthening Cyprus’ appeal as an investment destination, supporting foreign capital inflows and improving growth prospects.
Prudent policies remain essential
Patsalides stressed that economic resilience alone would not eliminate inflationary pressures, making the consistent implementation of prudent economic policies essential.
“In an environment characterised by global challenges, the consistent implementation of prudent economic policies remains the most effective way to shield the economy from the erosion caused by inflation,” he said.
He warned that the combination of upside risks to inflation and growing threats to the global economy made a disciplined and comprehensive policy approach increasingly important.
For the ECB, the challenge is to prevent the energy shock from becoming embedded in wider price and wage developments without unnecessarily undermining economic activity.
For Cyprus, the priority is to preserve the domestic conditions supporting growth while limiting the impact of persistent price increases on households, businesses and public finances.
Patsalides’ assessment underlines the importance of maintaining economic stability, protecting purchasing power and strengthening the country’s ability to absorb external shocks as uncertainty over energy prices and the wider geopolitical outlook continues.
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