The de-escalation of inflation in the Eurozone (not in Cyprus) continues, but risks from energy prices and geopolitical uncertainty continue to be the biggest challenge for the economy, according to the latest estimates by professional economists at the European Central Bank and the remarks of the Governor of the Central Bank of Cyprus, Christodoulos Patsalides.
The ECB's latest Survey of Professional Forecasters (SPF) records that medium-term inflation expectations remain stable at the 2% target, despite the short-term pressures that persist.
Economists predict that headline inflation in the Eurozone will stand at 2.7% in 2026, before falling to 2.2% in 2027 and 2% in 2028. Over the longer term, expectations remain at 2%, an indication that the ECB's monetary policy credibility remains strong. Core inflation, which excludes energy and food prices, is expected to recede more slowly as pressures from the cost of services and wages continue to weigh on the economy.
At the same time, the governor of the Central Bank, commenting on the ECB's monetary policy decision the day before yesterday, said that key interest rates remain unchanged, while so far the wider effects of the energy crisis remain limited. However, Mr. Patsalides noted that the economic outlook continues to be affected by increased geopolitical uncertainty, with risks to inflation remaining upside and risks to growth remaining downside. Mr. Patsalides underlined that high energy prices increase production costs and warned that the longer the conflict in the Middle East is prolonged, the greater the risk that these pressures will widen and become more persistent.
Despite the positive picture on the inflation front, growth remains the big question mark for the Eurozone. Respondents to the ECB's survey appear more cautious about the course of economic activity, pointing to risks related to geopolitical tension, uncertainty in energy markets, limited consumption and lower investment appetite among businesses. The likelihood of negative growth in any of the next quarters has increased, but forecasts do not point to a deep or prolonged recession scenario. The results of the survey provide a mixed message to the ECB that conducts monetary policy. On the one hand, the de-escalation of inflation reinforces the belief that monetary policy has achieved significant progress. On the other hand, weak growth creates pressure for a more supportive attitude in the future.
For the economies of the Eurozone, including Cyprus, the baseline scenario is a gradual return of inflation to normal levels, but without strong growth momentum. For the Cypriot economy, the ECB's decisions and international developments are of immediate importance, as they affect borrowing costs, consumption, investments and business activity.
The gradual decline in inflation may strengthen the purchasing power of households, but uncertainty around energy and geopolitical developments remain risk factors.
