IMF Nudges Cyprus Growth Up; Inflation Low

The International Monetary Fund (IMF) upgraded its 2025 growth forecast for Cyprus to about 2.9 percent, highlighting the economy’s resilience amid low inflation and stable external conditions. The outlook reflects strength in tourism, financial and professional services, and continued investment in energy transition and digital infrastructure. The Fund noted that macro fundamentals have improved markedly since the post-crisis clean-up, with healthier balance sheets, declining non-performing loans, and a more diversified credit base.

Inflation, measured by the Harmonised Index of Consumer Prices (HICP), remains subdued, helped by contained energy costs and soft import prices. With real wages rising modestly, private consumption continues to support near-term growth. Mortgage servicing remains manageable under expectations of gradual European Central Bank (ECB) easing in 2026. The banking sector reports strong capital ratios and ample liquidity, with asset quality still improving despite residual legacy exposures.

The IMF underscored that Cyprus’s energy diversification and investment inflows from EU recovery funds will be key to sustaining momentum. Capital spending in renewable energy, ICT, and logistics is expected to widen the country’s economic base and mitigate external vulnerability.

Risks are primarily external. Regional security disruptions, tourism sensitivity to European income shocks, and fluctuations in global oil prices (CL=F ≈ US$89) could test the forecast. Likewise, a stronger dollar (DXY) could tighten global financial conditions and affect service export competitiveness.

Market depth remains limited, so sovereign bond spreads and bank funding costs are the main indicators of sentiment. The baseline scenario points to steady growth with anchored inflation; the risk scenario involves a tourism downturn or renewed energy volatility.