Panayiotis Rougalas
The last time the European Central Bank (ECB) raised interest rates was on September 20, 2023. But all signs suggest that another increase could be coming as early as next week.
Market expectations strongly point to a further hike of at least 0.25%, with some analysts even leaving the door open to a 0.50% increase. In practice, financial markets have already priced in a 0.25% move through eurozone government bond yields, making it the “base case” scenario, although uncertainty remains.
A reported ceasefire proposal with stricter conditions sent to Tehran by U.S. President Donald Trump does not appear to have shifted market expectations or prompted any pause in ECB thinking. Instead, investors continue to anticipate further tightening, as speculation grows that inflation and energy risks linked to the Middle East conflict will keep pressure on prices.
Markets are now pricing in two additional rate increases by the end of 2026, driven mainly by inflation and rising energy costs linked to the ongoing war in the Middle East. The ECB deposit rate currently stands at 2%, with expectations it could rise to 2.5% by year-end.
For Cyprus borrowers, any increase would translate directly into higher loan repayments. Most variable-rate loans on the island are linked to Euribor, the ECB base rate, or banks’ own reference rates, meaning households could soon see their monthly installments go up again.
Each bank also applies its own pricing policies and risk criteria, meaning the impact will vary from lender to lender and from borrower to borrower. At present, ECB key rates stand at 2.00% for the deposit facility, 2.15% for main refinancing operations, and 2.40% for the marginal lending facility.
Inflation risks remain tilted upwards
Many analysts quietly believe the ECB is determined not to let inflation slip out of control again.
At its latest monetary policy meeting in late April, the central bank warned that inflation risks remain tilted to the upside, while growth risks are skewed downward. It also noted that the war in the Middle East has pushed energy prices higher, feeding inflation while weighing on economic sentiment.
The ECB said the impact of the conflict will depend on how long energy disruptions last and how strongly they spill over into broader prices and economic activity.
“The longer the war continues and energy prices remain elevated, the stronger the potential impact on inflation and the wider economy,” the ECB said, adding that it is prepared to manage ongoing uncertainty.
Inflation edges higher in Cyprus and the eurozone
In Cyprus, inflation reached 2.6% in May 2026 compared with a year earlier, according to the Cyprus Statistical Service. The Consumer Price Index fell slightly to 102.74 points from 102.80 in April, a marginal monthly decline of 0.06%.
Eurostat data show Cyprus’ annual inflation at an estimated 3.7% in May, up from 3.0% in April. Across the eurozone, inflation is expected to reach 3.2% in May, up from 3.0% the previous month.
Borrowing costs broadly stable, for now
ECB data show that overall borrowing costs remained broadly unchanged in April 2026.
Interest rates on new corporate loans above €1 million with variable rates stood at 3.31%. Loans of similar size with longer fixed-rate periods up to one year fell slightly to 3.50%, while long-term fixed-rate loans above 10 years rose to 3.74%.
For smaller loans of up to €250,000, rates increased to 3.70%.
Deposit rates for companies remained stable at 1.98% for fixed-term deposits, while overnight deposits stayed at 0.53%.
For households, mortgage rates continued to edge higher. Home loans with variable rates rose to 3.56%, while fixed-rate mortgages across different maturities ranged between 3.31% and 3.61%.
Consumer loans also climbed, reaching 7.59% on average.
