A slowdown in growth to 2.7% and an increase in inflation to 2.7% are among the key elements included in the Central Bank of Cyprus’ March macroeconomic projections for the Cypriot economy for 2026.
The Central Bank published its forecast for Cyprus’ main macroeconomic indicators for the years 2026–2028, including Gross Domestic Product (GDP), unemployment, inflation, and inflation excluding energy and food (core inflation).
As noted in the Bank’s press release, the March 2026 projections incorporate the economic impact of the war in the Middle East, as well as the repercussions of the outbreak of foot-and-mouth disease in Cyprus. As the Bank notes, due to the ongoing war in the Middle East, the significant increase in both oil prices and geopolitical uncertainty in the region is expected to have an immediate negative impact on the Cypriot economy, mainly in the short term. These effects particularly concern the tourism, shipping, construction, and real estate sectors, which depend heavily on inflows of foreign direct investment.
It is pointed out that the medium-term impact on the Cypriot economy will depend on the duration and intensity of the war. The baseline scenario assumes that the conflict will last about two months with high intensity, followed by a gradual de-escalation.
Regarding the impact of foot-and-mouth disease, it is expected to slow production in the livestock sector, with negative effects anticipated to dissipate by the end of 2026, depending on the spread of the disease, which is currently concentrated in specific areas of Cyprus. Based on the latest developments, the Central Bank notes that the overall impact on GDP and the labor market is expected to be very limited due to the small size of the sector.
Finally, with regard to the reduced but ongoing uncertainty surrounding U.S. tariff policy, the Central Bank does not identify negative economic effects, due to the very limited volume of trade in goods between the United States and Cyprus.
More specifically, GDP growth in 2026 is projected to slow to 2.7%, compared with 3.8% in 2025, while growth is expected to accelerate to 2.9% and 3.1% in 2027 and 2028, respectively.
According to the Central Bank, domestic demand in 2026–2028 is expected to be supported by continued growth in private consumption, driven by rising real disposable household income and the resilience of the labour market, despite the aforementioned shocks.
Compared with the Central Bank’s December 2025 projections, GDP growth has been revised downward by 0.3 and 0.1 percentage points for 2026 and 2027, respectively, mainly due to the war in the Middle East. The relatively limited impact in 2026 compared to December projections is attributed to stronger-than-expected economic growth in the fourth quarter of 2025, which influenced GDP dynamics in subsequent quarters, as well as the positive impact of tax reform.
For 2028, a slight upward revision of 0.1 percentage points is recorded, mainly due to the expected economic recovery compared to 2026–2027, within the context of gradually improving economic confidence.
Unemployment at 4.5%
The Central Bank states that the labour market continues to support the Cypriot economy and shows significant resilience. Unemployment is projected to stabilise at around 4.5% during 2026–2028, with a slight negative impact on employment growth in 2026 due to the Middle East crisis.
Compared with December 2025 projections, no revision is recorded for the unemployment rate for 2026–2028, as economic growth is expected to remain strong despite the downward revision of GDP for 2026, and due to continued tightness in the labor market.
Significant increase in inflation
In 2026, inflation, based on the Harmonised Index of Consumer Prices (HICP), is projected to rise significantly to 2.7% from 0.8% in 2025, mainly due to the economic impact of the war in the Middle East.
Specifically, significant upward pressures are expected on energy prices due to increases in international oil prices, with indirect effects on other components of inflation. Further upward pressures are expected on prices of non-energy industrial goods due to supply chain disruptions and higher production costs, partly driven by the EU’s exposure to rising natural gas prices.
Upward pressures are also expected on food prices, mainly due to higher fertiliser costs caused by supply chain disruptions in the Middle East, as well as the outbreak of foot-and-mouth disease in Cyprus, which is expected to push up prices of meat and dairy products.
According to the Central Bank, inflation is expected to decline to 2% in 2027, mainly due to a slowdown in energy and services prices, and to a lesser extent food prices. Energy prices are expected to drop significantly based on the assumption of a relatively rapid decline in oil prices in 2027. Services inflation is also expected to ease, mainly due to lower wage increases.
For 2028, inflation is projected to rise to 2.2%, mainly due to upward pressure on energy prices from the expected introduction of the EU’s expanded Emissions Trading System (ETS2), which is expected to affect domestic fuel prices.
Compared with December 2025 projections, total inflation for 2026 has been revised upward by one percentage point, due to increases in energy prices and other inflation components resulting from the war’s economic impact. Revisions for 2027–2028 (downward by 0.2% and upward by 0.3%, respectively) reflect lower energy inflation due to declining oil prices from 2027 and adjustments to assumptions regarding green taxation.
As for core inflation (excluding energy and food), it is projected to rise further to 2.3% in 2026, compared with 1.9% in 2025, mainly due to the effects of the war, higher services inflation, and increased prices of non-energy industrial goods.
In 2027–2028, core inflation is expected to remain around 2% annually, reflecting a gradual slowdown in services inflation, partly offset by weaker deflationary pressures in non-energy industrial goods.
Compared with December 2025 projections, core inflation has been revised upward by 0.6% and 0.2% for 2026 and 2027, respectively, due to the ongoing war in the Middle East.
The Bank assesses the risks of deviation from the baseline GDP projections for 2026–2028 as tilted to the downside. Key downside risks include higher-than-expected energy and imported input prices due to broader supply chain disruptions stemming from the war.
Additional risks arise from a potentially greater-than-expected negative impact on services exports if the war persists longer, as well as continued uncertainty regarding global trade policy. Climate change-related factors also pose downside risks to GDP.
Upside risks are linked to higher-than-expected wages due to labour market tightness and/or higher profit margins.
Regarding inflation, risks for 2026–2028 are assessed as tilted to the upside overall. The main upside risks relate to the possibility of higher-than-expected energy prices and imported goods and raw materials due to supply chain disruptions caused by the war.
They also include the possibility of stronger-than-expected wage pressures or increased profit margins. On the other hand, downside risks, though more remote, relate to more limited and shorter-lived economic effects from the war in the Middle East.
(Source: CNA)
