Inflation risks are increasing as energy prices remain elevated, but there is no evidence to justify an immediate interest rate increase, Central Bank of Cyprus Governor Christodoulos Patsalides said.

Speaking to financial news service Econostream, Patsalides supported the European Central Bank’s decision to leave interest rates unchanged, saying inflation remains broadly in line with expectations and second-round effects have yet to emerge.

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Energy Prices Remain Main Inflation Risk

“There was no evidence that would have supported a rate hike,” Patsalides said. “Second-round effects are not evident, expectations are anchored, and inflation is more or less in line with its expected path.” He said prolonged high oil prices remain the main risk to the inflation outlook if geopolitical tensions persist.

“As more time passes without a resolution of the situation, and prices remain elevated, being pre-emptive gains in importance,” he said.

Patsalides said the ECB will continue monitoring whether higher energy costs feed through to production costs, consumer prices, inflation expectations and wages. So far, he said, there is no evidence that inflationary pressures have broadened beyond energy, while wage demands remain contained.

ECB To Remain Data-Dependent

Patsalides said monetary policy decisions should continue to be based on incoming economic data rather than individual indicators. “One has to look at the whole set of data before assessing and deciding,” he said.

He also warned that larger fiscal deficits and higher defence spending across Europe could create additional inflationary pressures over the medium term.

No Return To Forward Guidance

Patsalides defended the ECB’s decision not to provide forward guidance, saying uncertainty remains too high to signal future policy moves.

“Honesty, flexibility and credibility” would be undermined if the central bank resumed forward guidance, he said. “One should not guide anyone toward a place that may not materialise, given the elevated uncertainty.”

He described the current level of interest rates as “neutral to restrictive” and said they remain “at the right level.”

Operational Framework Review

Asked about the ECB’s operational framework, Patsalides said discussions on minimum reserve requirements should form part of the broader review scheduled to begin in the autumn.

He added that this was not the right time to announce changes because heightened market volatility could create unnecessary confusion.