CBC Governor warns of possible deviation from growth forecast amid global uncertainty

The Governor of the Central Bank of Cyprus (CBC), Christodoulos Patsalides, has warned that escalating global uncertainty and the imposition of new trade tariffs could lead to a deviation from the Bank’s baseline scenario for economic growth in 2025.

In a public intervention posted on the CBC’s official website, Patsalides noted that the uncertainty surrounding the global economic outlook is not only persisting but intensifying, driven by the emergence of new, complex risks.

“Under these conditions, the likelihood of deviation from the baseline scenario is increasing,” he said.

The CBC’s current baseline macroeconomic forecast — drafted before recent developments regarding tariffs — projects GDP growth slightly above 3% for the 2025–2027 period, with inflation expected to decline toward the medium-term target of 2%.

However, the governor cautioned that newly imposed U.S. tariffs on the EU and other countries, along with likely countermeasures, are expected to have a spillover effect on the Cypriot economy.

“The CBC is currently analyzing updated scenarios as part of the Eurosystem, with results expected to be published in June 2025”, he said.

Patsalides warned of rising risks beyond trade, including cyberattacks, geopolitical tensions, and the cost of new EU defence plans, which could strain national budgets. He also flagged digital assets as a threat to financial stability and highlighted climate change as a key challenge. Global analyses, he noted, warn of stalled inflation decline, stagflation risks, and growing chances of extreme financial scenarios.

The Governor cited international analyses warning of possible setbacks in inflation deceleration and even the risk of stagflation, adding that financial stability risks are growing, with a higher probability of extreme scenarios materializing.

“Cyprus, as a small and open economy, must continue to implement prudent and disciplined policies to strengthen its resilience to external shocks,” Patsalides said.

“With steady and forward-looking navigation, our economy can seize new opportunities and enhance its position in the European and global economic landscape.”

Public and banking sectors key to stability

In this context, the CBC Governor stressed the need to bolster safety buffers across all sectors of the economy, with the public and banking sectors playing a leading role in maintaining stability and growth.

On the fiscal front, he emphasized that efforts to reduce public debt must remain on track, with a focus on curbing inflexible spending and rationalizing public sector wages.

“The only reliable way to strengthen resilience against potential revenue shortfalls during downturns is to enhance the flexibility of public spending,” he noted.

Patsalides stressed the need to fast-track digital transformation to boost productivity and attract investment. He also urged for quality, sustainable investments, export-driven production, and structural reforms to enhance competitiveness.

Regarding the banking sector, the Governor highlighted the importance of safeguarding the resilience of banks and their capacity to finance businesses and households. Financial institutions, he said, must protect their strong capital positions and manage operational costs and dividends cautiously. He also emphasized the importance of managing reputational risk, warning that negative developments could erode confidence and trigger capital flight or credit rating downgrades.

Patsalides noted that the Cypriot economy has proven its adaptability during challenging times.

“In today’s unstable and shifting international environment, foresight, prudence, and flexibility are fundamental tools for achieving sustainable growth,” he said.

He also said that in the digital era of artificial intelligence, adaptability must be both rapid and constant.

(Source: CNA)