The Central Bank of Cyprus (CBC) has revised down its economic growth forecasts for 2026 and 2027, attributing the adjustments primarily to the ongoing conflict in the Middle East. The CBC now projects GDP growth of 2.5% in 2026, down from 2.7% forecasted earlier this year, and 2.9% in 2027, slightly lower than the previous 3% estimate. The bank highlighted that uncertainties surrounding the US-Iran agreement pose downside risks, particularly if it is not fully implemented, which could lead to supply disruptions and higher energy prices affecting Cyprus's economy.

The CBC also raised its inflation forecast sharply, expecting consumer price inflation to reach 3.2% in 2026, up from 0.8% in 2025, before easing in subsequent years. Inflationary pressures are driven mainly by rising international oil prices and disruptions in supply chains, with impacts on sectors like tourism, shipping, and construction due to weaker demand and investment flows. Despite these challenges, private consumption and major investment projects are expected to remain resilient, supported by a robust labor market and higher real disposable incomes.

On the labor front, employment growth is projected to slow to 1.3% in 2026, with the unemployment rate slightly rising to 4.6%, reflecting the conflict's economic impact, but expected to stabilize thereafter. The CBC continues to monitor risks related to energy prices, geopolitical instability, and climate factors that may influence inflation and economic performance in Cyprus over the coming years.