Panayiotis Rougalas
The ceasefire has not eliminated the economic risks stemming from the conflict involving the United States, Israel, and Iran. However, there are growing signs that economic conditions may gradually return to their pre-war state.
Although inflation reemerged after a period of relative calm before the outbreak of the war and climbed high enough to prompt the European Central Bank (ECB) to raise interest rates by 0.25 percentage points last Thursday, the ceasefire has once again changed the outlook. For now, volatility in energy markets, difficulties in transporting oil and natural gas, and disruptions in supply chains continue to affect the global economy. At the same time, hopes that the current ceasefire will lead to a permanent end to the war have boosted confidence.
Even if the expected agreement is formally signed in Switzerland on June 19, inflationary pressures will remain a significant issue that policymakers will eventually need to address. The end of the war will not automatically bring an immediate decline in inflation. Price pressures are expected to remain elevated for some time before beginning to ease. Market attention is also focused on the U.S. Federal Reserve, which is scheduled to make policy decisions on June 17 during the first meeting chaired by its new governor, Kevin Warsh.
Inflation's return forced the ECB to raise interest rates by 0.25 percentage points last Thursday.
Before deciding to increase rates, the ECB examined several economic scenarios. According to the official statement released alongside last Thursday’s decision, the baseline projections prepared by Eurosystem experts estimate that headline inflation will average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028.
Core inflation, which excludes energy and food, is projected to average 2.5% in both 2026 and 2027, before easing to 2.2% in 2028.
Compared with the projections published in March, experts revised their baseline inflation forecasts upward for 2026 and 2027, largely because of stronger increases in energy prices. Those increases are expected to feed through, to some extent, into food, goods, and services prices.
Under the baseline scenario, economic growth is expected to average 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. These figures represent downward revisions for 2026 and 2027 and reflect the stronger impact of the war on commodity markets, real incomes, and consumer confidence.
Banks welcome the outlook
The outlook remains uncertain, but it is considerably more positive following the ceasefire.
At least at this stage, banks in Cyprus have not suffered losses. In fact, they are expected to benefit from the ECB’s latest rate increase. Excess liquidity deposited with central banks will once again work in their favor, increasing earnings going forward.
According to estimates obtained by Kathimerini, the 25-basis-point increase could generate close to €35 million in additional profits for Cypriot banks.
At the same time, internal scenarios that anticipated a reduction in lending because of uncertainty, inflation, and geopolitical instability may now become less relevant. While the war did create some hesitation among investors, official data indicate that it did not result in a significant decline in lending activity.
Growth expected to slow before recovering
According to forecasts issued by the Central Bank of Cyprus (CBC) in March 2026, which take into account both the effects of the war in the Middle East and the outbreak of foot-and-mouth disease in Cyprus, economic growth is expected to slow to 2.7% in 2026 from 3.8% in 2025.
Growth is then projected to accelerate, reaching 2.9% in 2027 and 3.1% in 2028.
Domestic demand during the 2026-2028 period is expected to benefit from continued growth in private consumption, supported by rising real disposable income and a resilient labor market, despite weaker consumer confidence linked to the war.
Economic activity is also expected to receive a significant boost from major private infrastructure investments and increased exports, particularly in technology, financial, and professional services.
Tourism is expected to face challenges in 2026 but is projected to recover beginning in 2027.
Inflation is forecast to rise noticeably to 2.7% in 2026, driven primarily by higher energy prices, supply chain disruptions, and increased international prices for fertilizers and food products.
In 2027, inflation is expected to ease to 2.0% as energy and services prices decline. A slight increase to 2.2% is projected for 2028, mainly because of the implementation of the expanded Emissions Trading System (ETS2), which is expected to increase fuel costs.
Oil prices decline
According to the Athens News Agency, Brent crude oil fell below the $80-per-barrel mark on Tuesday for the first time since early March, reacting to the prospect of the full reopening of the Strait of Hormuz, which U.S. President Donald Trump announced is expected on Friday.
Oil prices continued their downward trend following the announcement of an agreement between Tehran and Washington aimed at ending the war in the Middle East and restoring maritime traffic through this strategically important shipping route.
At 3:25 p.m. Cyprus time, August Brent crude futures from the North Sea were trading at $80.08 per barrel, down 3.72%.
