Domestic demand set to drive robust economic momentum in Cyprus

The Central Bank of Cyprus (CBC) on Friday reported that Cyprus’ GDP growth rate is expected to decelerate to 3.5 per cent in 2025, compared with 3.9 per cent in 2024, while remaining robust in the medium term.

Moreover, the CBC forecast that GDP will grow by around 3 per cent per year during the period 2026 to 2028, reflecting sustained economic momentum.

CBC governor Christodoulos Patsalides said the momentum of the Cypriot economy indicates strong foundations, addinb that the country shows flexibility and adaptability in responding to external pressures.

According to the CBC’s December economic bulletin, the public debt-to-GDP ratio fell to 56.2 per cent in November 2025, down from 65.8 per cent in November 2024.

The bulletin also reported that unemployment stood at 4.5 per cent, while core inflation is projected at 1.9 per cent on average during 2025 to 2028.

“The projected path of GDP is mainly due to the expected further increase in domestic demand throughout the forecast horizon, and to a relatively lesser extent the expected path of external demand,” said the Central Bank of Cyprus.

Compared with the Central Bank’s September 2025 forecasts, there was a small downward revision of 0.2 percentage points in GDP growth for 2025, while no change is expected for the period 2026 to 2027.

“The revision for 2025 is due to the better than expected performance of the technology, trade and tourism sectors, as well as financial services, during the third quarter of the current year,” the Central Bank added.

Under the baseline scenario, the Central Bank expects balanced risks to GDP in 2025 and slightly downward risks for the period 2026 to 2028.

For inflation, risks are assessed as balanced in 2025 and slightly upward in the period 2026 to 2028.

“The Cypriot economy continues to demonstrate resilience and positive prospects, despite the constantly changing international environment, which is characterised by ongoing geopolitical tensions and trade uncertainties,” said Patsalides.

“The momentum of the Cypriot economy suggests that the country has strong foundations and demonstrates flexibility and adaptability in addressing external pressures, which is also reflected in credit rating agencies’ assessments,” he added.

“The positive picture of the economy is also reflected in public finances,” Patsalides explained.

The governor pointed out that the fiscal surplus reached 3.2 per cent of GDP during the first eleven months of 2025.

He said the decline in the public debt ratio to 56.2 per cent in November 2025 represents a significant improvement compared with November 2024, driven by economic growth, prudent fiscal policy and high primary surpluses.

Turning to the banking sector, Christodoulos Patsalides said the Cypriot banking system has entered a phase of substantial maturity, both reflecting and supporting the broader economic dynamic.

After a period of intense turbulence in the past, the domestic banking system is now fundamentally stronger, having undergone both qualitative and quantitative transformation.

“The strengthening of balance sheets, the improvement of business models and the upgrading of banks’ risk management together create an environment of increased resilience, capable of responding to complex and changing conditions,” he said.

What is more, Patsalides said the Cypriot economy and financial system continue to demonstrate strong resilience and positive momentum, despite multifaceted international challenges.

“Maintaining this course requires prudent economic policy, strengthening competitiveness and investments in sectors that create long-term value,” he added.

“It also presupposes strengthening flexibility and adaptability, due to the rapid development of technology and the rapidly changing environment,” he stressed.

He further stated that the Central Bank of Cyprus remains committed to safeguarding financial stability, which he described as a key prerequisite for a sustainable and resilient economic environment.

According to the December economic bulletin, unemployment is expected to decline further to 4.5 per cent during 2025 to 2028, compared with 4.9 per cent in 2024, supported by continued steady GDP growth.

Despite ongoing geopolitical tensions, the Central Bank forecasts that inflation based on the Harmonised Index of Consumer Prices will fall to 0.8 per cent in 2025, down from 2.3 per cent in 2024.

Inflation is then expected to rise to 1.7 per cent in 2026, 2.2 per cent in 2027 and 1.9 per cent in 2028.

Core inflation is projected to average around 1.9 per cent during 2025 to 2028, compared with 2.6 per cent in 2024.

“The slight downward revision of inflation by 0.2 percentage points in 2025 compared with the September 2025 forecasts is due to downward revisions in food prices, from the processed food component, and in prices of non-energy industrial goods, taking into account their more negative than expected performance in recent months,” said the Central Bank.

“The downward revision of inflation for 2026 by 0.4 percentage points is mainly due to the significant downward revision in energy prices and non-energy industrial goods prices,” it added.

This development arises mainly from the downward impact of the recent extension of the existing government relief measure, which reduced VAT on electricity prices from 19 per cent to 9 per cent until December 2026.

“Downward revisions in non-energy industrial goods prices, based on the most recent data, are also expected to contribute to the downward revision of overall inflation for 2026,” the Central Bank said.

The bulletin also reported that the current account deficit adjusted for Special Purpose Entities reached €1.51 billion in the first half of 2025, equivalent to minus 8.5 per cent of GDP and broadly unchanged from the same period of 2024.

It said the surplus in the services balance improved by €514.5 million in the first half of 2025, mainly due to strong net exports of technology services, travel and tourism, as well as financial and other business services.

“Deposits of the domestic private sector continued to increase in 2025, reflecting the maintenance of strong economic activity,” the Central Bank added.

It said the annual growth rate of net lending to the private sector accelerated significantly during the first ten months of 2025, while new lending to the non-financial private sector reached a historical high between January and October 2025.

According to the Central Bank, the gradual easing of European Central Bank monetary policy from mid-2024 to mid-2025 contributed to lower borrowing rates in Cyprus.

Borrowing rates in Cyprus are now converging towards the euro area median, while deposit rates remain at lower levels compared with those in the euro area, it said.