Central Bank of Cyprus (CBC) governor Christodoulos Patsalides said that the country must remain prudent and vigilant in order to navigate the mounting global uncertainty.

In an interview with Politis, Patsalides stressed that Cyprus needs to fortify its economic resilience by building fiscal buffers, maintaining surpluses, and investing in strategic sectors that can shield the economy from future shocks.

“The era we are living in is full of uncertainties; geopolitical, technological, environmental,” he said.

“We must be ready for every scenario, build reserves, safeguard our surpluses and invest in sectors that will strengthen the resilience of the Cypriot economy,” he added.

Moreover, he said that responsibility, transparency and cooperation from all segments of society are essential to manage this volatile landscape.

Touching on the recent devastating wildfire in the Limassol mountains, Patsalides said climate change is already being experienced in dramatic ways, not only in Cyprus but across the region.

“The climate risk has been incorporated into the factors assessed by the European Central Bank (ECB) as part of its primary goal of ensuring price stability,” he explained.

“The ECB has also examined the implications for the banking system and has issued guidelines to banks for assessing and managing climate risk.”

He described recent NASA imagery showing fires across the Mediterranean and projections of temperatures reaching 50 degrees Celsius as stark indicators of the urgent threat.

“The deterioration in climate conditions and the resulting risks are particularly significant for Cyprus,” he said.

In response, the CBC has formed a Sustainability Committee at the board level and a dedicated working group of technocrats to develop a strategy for sustainability and climate change adaptation.

This strategy will be aligned with the ECB’s direction.

Additionally, a Climate Change Office has been established within the CBC to monitor the impact of climate change on the Cypriot economy and to support the transition to a sustainable economic model.

On monetary policy, Patsalides explained that the ECB Governing Council decided in its July meeting to pause further interest rate reductions, citing the near-target inflation rate and ongoing data assessments.

“At each Governing Council meeting, our interest rate decisions are based on an evaluation of inflation prospects and the surrounding risks, according to the latest economic data and the dynamics of underlying price pressures,” he said.

“This includes factors such as wage growth and how quickly market interest rates adjust in response to changes in ECB policy rates, which in turn affects loan demand.”

He pointe out that inflation in July remained stable at 2 per cent, which aligns with the ECB’s medium-term target.

“The most recent data confirmed what we had anticipated regarding the inflation trajectory,” he added.

“Domestic price pressures are gradually subsiding and wage increases are occurring at a slower pace.”

He stated that, thanks in part to previous rate cuts, the eurozone economy has shown resilience, despite global headwinds.

“Nonetheless, the environment remains uncertain, mainly due to trade tensions,” he said.

“In this context, we decided to keep the ECB’s three key interest rates unchanged.”

He cautioned against interpreting the July decision as a pause, saying that economic conditions will be reviewed afresh at every meeting.

“It is premature to regard our decision as indicative of a fixed course,” he said.

Patsalides confirmed that there is no longer any forward guidance on interest rates.

“There is no commitment to a specific path for interest rates,” he said.

“Monetary policy decisions are now data-dependent, and at each meeting we decide the direction of policy based on the evaluation of incoming information.”

He stressed that this approach is necessary due to the high levels of uncertainty affecting both the eurozone and the global economy.

“There is geopolitical risk, geostrategic instability, and trade wars; all of these influence our decisions and lead us to adopt a more conservative stance in our forecasts,” he said.

“In such an environment, it is not wise to pre-emptively guide the market in a specific direction.”

Still, he reiterated the ECB’s core mission. “Our objective remains the safeguarding of price stability,” he said.

“As a Governing Council, we are ready to use all tools at our disposal, within our mandate, to ensure that inflation remains close to our medium-term target of 2 per cent and that monetary policy continues to function effectively for everyone.”

Commenting on the recent US–EU trade agreement on tariffs, Patsalides said it removes a source of uncertainty but still carries consequences.

“The agreement eliminates one area of doubt but negatively affects EU exports to the US, slowing European economic growth,” he said.

“I do not see a risk of recession, however,” he added.

He mentioned that in the short term, the deal tends to raise US import prices; one of the reasons the US Federal Reserve is cautious about lowering rates.

“It is my view that trade wars and protectionism, more generally, benefit no one,” he said.

Asked about the agreement’s impact on Cyprus, Patsalides said it would likely be minimal.

“Exports of goods from Cyprus to the US account for a negligible share of our total trade in goods,” he said.

“So we do not expect any direct impact.”

However, he warned that Cyprus could be affected indirectly through slower European growth.

“Based on our latest forecasts, economic growth in the eurozone over the next three years is expected to be around 1 per cent,” he said.

“These tariffs may slightly further restrict that growth, though not substantially.”

“If eurozone growth is limited, Cyprus will also be somewhat affected, as a small and open economy.”

He also stated that prolonged uncertainty could deter investment in Cyprus.

Turning to domestic economic conditions, Patsalides said the Cypriot economy is displaying strong momentum, with growth above 3 per cent.

He attributed this performance to several favourable external factors, including the arrival of foreign companies due to the war in Ukraine, investment from Israel and Lebanon, Cyprus’ comparative stability, and the resilience of the European economy, which supports tourism inflows.

Asked how the country can maintain this growth rate, Patsalides responded with a laugh, “Everything worries me!”

He elaborated that Cyprus, being a small and open economy, is more vulnerable to external shocks.

For this reason, he explained, Cyprus needs to be extra cautious and stricter than most, even if it may seem extreme.

“Cyprus must maintain better macroeconomic, microeconomic and financial indicators than the larger eurozone countries, because our economy is smaller and more easily affected by external factors,” he said.

He emphasised that Cyprus is performing well fiscally, and that preserving the budget surplus is essential.

“It is vital that public debt continues to fall,” he said.

“That way, if anything happens, the Cypriot government will be able to support the sectors that are hit,” he continued. “This fiscal buffer must be protected.”

He added that while social benefits should be provided where needed, the surplus must be preserved.

“The surplus is linked to higher revenues from economic growth, but this growth can change at any time,” he said.

“We have projected growth of 3 per cent until 2027, but these estimates are subject to high uncertainty due to geopolitical instability,” he concluded.