The Central Bank of Cyprus has lowered its economic growth forecasts for 2026 and 2027, warning that the war in the Middle East is creating a more challenging outlook for the economy through weaker tourism, higher energy prices and continued uncertainty over global trade. While domestic demand is expected to remain resilient, the bank now expects slower growth and higher inflation than it projected just three months ago.

Growth Outlook Softens On Geopolitical Shock

In its June 2026 Economic Bulletin, the Central Bank revised its GDP forecast for this year to 2.5%, down from 2.7% in March. Growth for 2027 was also trimmed slightly, from 3% to 2.9%, while the economy is still expected to expand by 3.1% in 2028.

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According to the bank, the downgrade is relatively modest because the March projections had already incorporated conservative assumptions about geopolitical risks. Even so, the outlook remains highly dependent on developments in the Middle East. If the agreement announced between the United States and Iran fails to materialise or is not implemented, Cyprus could face fuel shortages, higher import costs and further supply-chain disruption.

Those risks are expected to weigh most heavily on tourism, shipping, construction and real estate. As a result, the Central Bank expects net exports to subtract from economic growth this year because of weaker tourism revenues, lower shipping receipts and slower growth in other service exports. Domestic demand, however, should continue to provide support, helped by higher real household incomes, a resilient labour market and continued investment in large private projects, even if some of them are delayed.

“Although their implementation schedule may be affected by the crisis in the Middle East, these projects are not expected to be cancelled,”

the Central Bank said.

Inflation Forecast Raised

The biggest revision in the latest projections concerns inflation. The Central Bank now expects inflation, measured by the Harmonised Index of Consumer Prices (HICP), to average 3.2% in 2026, compared with 0.8% in 2025 and 0.5 percentage points higher than forecast in March.

Higher energy prices remain the main driver, reflecting the impact of the conflict on international oil markets and supply chains. Those pressures are expected to feed through to food prices and other goods before inflation gradually eases to 1.9% in both 2027 and 2028. Core inflation, which excludes food and energy, is projected to rise to 2.3% this year before moderating over the following two years.

Labour Market Remains A Bright Spot

Despite the weaker economic outlook, the labour market is expected to remain resilient. Employment growth is forecast to slow from 1.7% in 2025 to 1.3% this year before recovering in 2027 and 2028, while unemployment is projected to edge up only slightly to 4.6% before stabilising around 4.5%, a level the Central Bank considers consistent with full employment.

At the same time, policymakers warned that risks to inflation remain tilted to the upside. Persistently high oil prices, climate-related disruptions and stronger-than-expected wage growth could all keep price pressures elevated for longer than currently forecast.