Cypriot households and businesses could face prolonged financial pressure if the Middle East conflict drives oil prices higher and keeps eurozone inflation elevated.

Economists said the European Central Bank’s latest projections, which see inflation returning to its 2% target only by the end of 2027, suggest price pressures may persist over the medium term.

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Higher Oil Prices Could Bring More Rate Hikes

Sofronis Clerides, an economist at the University of Cyprus, said the ECB’s latest rate increase was broadly expected but warned that a worsening geopolitical situation could push oil prices and inflation higher.

“If the war situation continues to worsen, there is likely to be greater pressure on oil prices and consequently greater inflationary pressures and further interest rate increases in the coming months,” Clerides said.

Floating-rate borrowers would feel the impact most quickly as higher policy rates raise monthly loan repayments and business financing costs. Clerides urged households and companies to plan for the possibility of further increases.

Inflation May Take Longer To Ease

Clerides said the ECB’s end-2027 inflation forecast indicates that policymakers expect current price pressures to persist before eventually easing.

The timeline also suggests that recent rate increases could take months to fully affect economic activity. ECB President Christine Lagarde has said the inflation outlook remains dependent on how the energy shock develops.

Cost-Push Inflation Creates A Policy Dilemma

Marios Christou, an economist at the University of Nicosia, said renewed Middle East fighting and continued tensions involving the US and Iran could further increase oil prices.

Higher energy costs feed into production, transportation and operating expenses, pushing consumer prices higher even without strong demand. “Here we have an increase in inflation, not so much because of demand, but because of rising costs, or cost-push inflation,” Christou said.

That makes the ECB’s response more difficult because higher interest rates are designed primarily to reduce demand, while the current pressure is coming largely from higher costs.

Mortgage Holders Face Particular Pressure

Lower-income households have less room to absorb higher living costs, while people with floating-rate loans face rising repayments. Mortgage holders are particularly exposed because housing loans are typically large and extend over many years.

“The problem arises with mortgages because the loan amounts are high,” Christou said, noting that even changes in interest costs can create significant pressure over long repayment periods.

For Cyprus, prolonged inflation and higher rates could reduce disposable income, increase debt-servicing costs and weigh on household consumption. Businesses could also face higher financing costs as geopolitical uncertainty complicates investment decisions.

Christou said households could face more than a year of continued pressure if inflation does not return to the ECB’s target until the end of 2027.