CBC governor warns against complacency despite positive outlook

Central Bank of Cyprus (CBC) governor Christodoulos Patsalides has outlined a roadmap for the Cypriot economy, balancing optimism with a stern warning that current successes must not lead to a lack of vigilance.

In an article first shared in Cyrpriot daily Phileleftheros, the governor suggested that while the country is starting the year from a position of strength, the global landscape remains treacherous.

He explained that the Cypriot economy maintains solid prospects with a growth rate expected to hover around 3 per cent in the coming period, a figure significantly higher than the euro area average.

Patsalides stated that public debt is on a steady downward path, with the debt to GDP ratio falling below 60 per cent for the first time in several years, finally meeting the Maastricht Treaty threshold.

Inflation is projected to remain stable at 2 per cent, while the labour market continues to demonstrate resilience under conditions of full employment.

“The rising year finds the Cypriot economy and the banking sector at a positive starting point,” he said.

However, the governor was quick to point out that the international environment, characterised by disruptions and geopolitical volatility, demands prudence and flexibility.

As a small, open economy, Cyprus must maintain sufficient fiscal buffers to guard against downward risks.

He recommended a policy of restraining inelastic spending and promoting reforms that focus on efficiency.

“The enhancement of productivity must constitute the core of all reforms,” he said, repeating a statement he previously made to the Parliamentary Committee on Financial and Budgetary Affairs.

He added that increased productivity restrains inflation, improves fiscal indicators, and makes the country more competitive.

Turning his attention to the broader euro area, Patsalides said that while the region shows signs of resilience and inflation remains near the medium-term target of 2 per cent, Europe must make bold decisions to boost its competitiveness.

He argued for the completion of the Banking Union and the advancement of the Savings and Investment Union to unlock potential growth.

A major pillar of this future is the digital euro, the governor mentioned.

As more Europeans move away from physical cash, the governor believes a digital version of the single currency is an imperative necessity.

“I believe it is an urgent need to establish the digital euro, a digital form of cash that will function complementarily to banknotes and coins,” he said.

The year 2026 is considered a critical year for this project, he said, as the legislative act is expected to be issued.

If the legislation is enacted, the European Central Bank could start a pilot programme in 2027, with the Eurosystem potentially ready for a first issuance of the digital euro by 2029.

What is more, the governor mentioned that the Cypriot banking system also enters 2026 from a position of strength, having maintained high capital adequacy levels and historically low non-performing loans over the past year.

While profitability remains satisfactory, it has begun to normalise following the European Central Bank’s monetary policy adjustments.

Banks now face increasing competition from digital banks and companies operating outside the traditional banking spectrum, alongside threats from cyber-attacks and climate risks.

To combat these challenges, he continued, the Central Bank of Cyprus has implemented targeted measures.

Starting in mid-January 2026, the countercyclical buffer will increase from 1 per cent to 1.5 per cent, representing a €71 million capital increase.

Furthermore, the target level for the Deposit Guarantee Fund has been raised from the legal minimum of 0.8 per cent to 1.25 per cent of covered deposits.

This move, involving €137 million, places Cyprus in seventh place among euro area member states for deposit protection.

“These measures aim at shielding the resilience of the financial system and strengthening the protection of depositors,” he said.

The total value of these protective measures amounts to €208 million.

Furthermore, Patsalides also invoked the words of a former American president to justify taking action while the economy is still performing well.

“The time to repair the roof is when the sun is shining,” he said, paraphrasing John F. Kennedy’s 1962 State of the Union address.

Patsalides also stressed that Cyprus must exploit favourable circumstances to implement reforms that establish sustainable growth with positive effects for society at large.

“We must therefore utilise favourable coincidences by taking decisions, measures and reforms that strengthen resilience and consolidate sustainable development,” he concluded.