Panayiotis Rougalas
Bank lending in Cyprus had been on a strong upward trend for the past year and a half, but the war involving the United States, Israel, and Iran brought that pace to a stop. As a result, forecasts of slower credit growth were confirmed in March, even though Cyprus continues to perform well economically. Investor confidence was affected by uncertainty, rising inflation, expectations of higher interest rates, which eventually became a reality in June 2026, and higher energy and fuel prices.
The decline in new lending during March 2026, the month when the conflict involving Iran reached its peak, was reported by the Central Bank of Cyprus in its June 2026 Economic Bulletin. According to the data, credit growth to the domestic private sector strengthened throughout 2025 and in early 2026, but began to slow in March 2026 because of increased geopolitical uncertainty. The annual growth rate of net loans to the domestic private sector reached 7.4% in February 2026, although from a low base, before easing to 6.4% in March.
The slowdown was driven primarily by weaker lending to non-financial corporations. The annual growth rate for business lending stood at 6.3% in March 2026, compared with 7.5% in December 2025. It had previously reached 8.2% in February 2026, again from a low base, marking the fastest annual growth rate since 2010.
Household lending, on the other hand, continued to strengthen gradually. The annual growth rate increased to 4.8% in March 2026 from 3.8% in December 2025. Domestic regulators said these trends reflect slower net new lending under conditions of elevated uncertainty and high energy costs, both of which have weighed on investment activity.
New lending to the domestic private sector totaled €1.1 billion during the first quarter of 2026, compared with €1.2 billion during the same period in 2025. The decline was largely the result of lower business borrowing. Continued growth in household lending, particularly for mortgages, helped offset part of the drop.
Overall, the Central Bank said credit growth remains resilient despite the uncertain environment.
Borrowing costs
The average interest rate on new business loans fell to 4.0% in March 2026 from 4.2% in December 2025. The average rate for new mortgage loans remained unchanged at 3.1% between December 2025 and March 2026, staying below the eurozone median.
Deposit rates were generally stable over the same period. The average rate for household deposits remained at 1.2%, while the average rate for business deposits edged up to 1.3% in March 2026 from 1.2% in December 2025. Overall, deposit rates in Cyprus continue to remain below the eurozone median, reflecting high excess liquidity, a stable funding base, and the relatively small size of the country's banking sector.
GDP growth also slows
Economic growth is expected to slow to 2.5% in 2026, compared with 3.8% in 2025. Growth is then forecast to accelerate to 2.9% in 2027 and 3.1% in 2028.
According to the Central Bank's report, domestic demand between 2026 and 2028 is expected to remain supported by continued growth in private consumption, driven by higher real household disposable income despite inflationary pressures. A resilient labor market is also expected to support demand, despite recent economic disruptions.
The report adds that although geopolitical uncertainty is weighing on investment activity, major private non-residential projects currently under construction are expected to provide significant support for domestic demand.
While the Middle East crisis could delay some of these projects, they are not expected to be canceled because the geopolitical instability is viewed as temporary and the projects themselves have long completion timelines.
Net exports are expected to make a negative contribution to GDP in 2026 because of lower exports, mainly the result of weaker tourism revenue. Imports are also expected to slow significantly as domestic demand weakens. Revenue from the shipping sector is also projected to decline because of disruptions caused by the conflict in the Middle East.
Exports of other services are expected to continue growing, although at a slower pace because of a less favorable international environment.
During 2027 and 2028, net exports are expected to contribute positively to GDP, largely because tourism is forecast to recover, even as imports increase.
Slight slowdown in employment
Employment growth is expected to slow to 1.3% in 2026 from 1.7% in 2025, mainly because of the effects of the Middle East crisis. Growth is then expected to pick up to 1.5% in 2027 and 1.7% in 2028.
The unemployment rate is projected to edge up slightly to 4.6% in 2026 because of the economic impact of the Middle East crisis. However, continued labor shortages are expected to limit the increase. During 2027 and 2028, unemployment is forecast to stabilize at around 4.5%, a level consistent with full employment.
Nominal compensation per employee, including wages and employers' social security contributions, is expected to increase by 2.7% in 2026, down from 4.2% in 2025. The slower pace reflects lower growth in compensation across both the public and private sectors, partly because inflation remained low in 2025, reducing the cost-of-living adjustment. Compensation per employee is then expected to strengthen as inflation increases and the cost-of-living adjustment is gradually restored to 100% beginning in July 2027.
