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Central Bank Of Cyprus Lowers Growth Forecasts Amid Middle East Conflict

by THEFUTURE.TEAM

June 22, 2026

The Central Bank of Cyprus (CBC) has lowered its GDP growth forecasts for 2026 and 2027 as the conflict in the Middle East continues. Growth is now expected to reach 2.5% in 2026, down 0.2 percentage points from previous projections, while the estimate for 2027 stands at 2.9%. Inflation risks, meanwhile, are expected to remain elevated.

Rising Inflationary Concerns

Updated projections also point to higher inflation. Headline inflation is now forecast at 3.2% in 2026, 0.5 percentage points above earlier estimates. According to the CBC, the increase mainly reflects the impact of the conflict in the Middle East. Core inflation, which excludes energy and food prices, remains unchanged at 2.3%.

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Sectors Under Strain And Market Dynamics

Sectors linked to international investment, including tourism, shipping, construction, and real estate, could come under pressure from higher oil prices and growing geopolitical uncertainty, the bank said. Further risks stem from possible fuel shortages and supply chain disruptions, which could add to price pressures affecting energy, industrial goods, and food.

Risk Factors And Outlook

Under its baseline scenario, the CBC assumes the conflict will continue until the final quarter of 2026 before gradually easing. Risks to growth remain tilted to the downside, while inflation risks continue to point upward. Much will depend on both the duration and intensity of the hostilities.

Among the factors highlighted by the bank are fuel shortages, higher energy and import costs, and pressures linked to climate change. A possible agreement between the United States and Iran would represent a positive development. Uncertainty persists, however, as the deal has yet to be finalized.

Domestic Demand And Resilient Labor Market

Despite the external challenges, rising disposable incomes and private consumption are expected to support domestic demand. Additional support is projected to come from non-residential private investment, although short-term geopolitical developments could affect the timing of some projects. Labour market conditions are expected to remain relatively stable, with only a slight increase in unemployment forecast.

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ECB Wage Tracker Signals Stable Wage Pressures And Moderate Growth Through 2026

The European Central Bank has published an updated wage tracker showing that negotiated wage pressures remain stable. Based on agreements signed through the end of May 2026, negotiated wage growth is expected to reach around 2.6% by December.

Quarterly And Yearly Dynamics

The headline indicator, which smooths one-off payments to reflect quarterly and monthly developments, points to wage growth of 3.2% in 2025 and 2.3% in 2026. For 2026, average growth is estimated at 1.8% in the first quarter and 2.1% in the second quarter before accelerating to 2.6% in the final two quarters of the year.

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Mechanical Effects And Forecast Nuances

According to the ECB, annual growth figures are still influenced by one-off payments made in 2024 but not repeated in 2025. Their impact is expected to gradually fade during 2026. Excluding the smoothing effect, the tracker points to negotiated wage growth of 3.0% in 2025 and 2.6% in 2026. Removing one-off payments altogether results in a decline from 3.8% in 2025 to 2.6% in 2026, indicating slower growth in base wages.

Employee Coverage And Forward-Looking Projections

Coverage data currently available for 2026 shows that employees included in the tracker accounted for 46.4% in the first quarter. That share falls to 44.8% in the second quarter, 41.1% in the third quarter, and 40.4% in the final quarter of the year. The current release extends to December 2026. Additional collective agreements included in the July 2026 update are expected to expand the horizon to the first quarter of 2027.

Caveats And Broader Context

The ECB said the tracker is subject to revision and should not be viewed as a formal forecast. Instead, it reflects information available from active collective bargaining agreements. For a broader picture of wage developments across the euro area, the central bank referred to the June 2026 Eurosystem Staff Macroeconomic Projections, which forecast compensation growth per employee of 3.2% in 2026.