Cypriot economists warn of further ECB rate increases if Middle East war worsens

Cyprus borrowers face further pressure from possible rate increasesCypriot economists have warned that the European Central Bank (ECB) could raise interest rates further if the war in the Middle East continues to worsen, as higher oil prices threaten to prolong inflationary pressures. The economists, speaking to the Cyprus News Agency (CNA) on Friday, also said the ECB’s expectation that inflation will return to its 2 per cent target by the end of 2027 pointed to a prolonged period of price pressures. University of Cyprus economist Sofronis Clerides said the ECB’s latest rate increase had been expected given the inflationary trends seen in recent months. “If the war situation continues to worsen, there is likely to be greater pressure on oil prices and consequently greater inflationary pressures and further interest rate increases in the coming months,” Clerides said. He said higher interest rates would increase borrowing costs, discourage investment and raise loan repayments for borrowers with floating-rate loans, putting additional pressure on household and business budgets. “Everyone should manage their finances prudently, bearing in mind that we may have further increases in the coming months and therefore further increases in repayments,” Clerides said. Commenting on ECB president Christine Lagarde’s statement that inflation would return to the bank’s 2 per cent target by the end of 2027, Clerides said the timeframe gave an indication of the ECB’s expectations for the path inflation would take. “The fact that they are still giving it another 15 to 16 months shows that they expect inflationary pressures to worsen in the near term,” he said, adding that it would take time for higher interest rates to have their full effect. “They appear to expect that at some point during 2027 the trend will begin to reverse, eventually reaching the 2 per cent inflation target by the end of 2027,” Clerides stated. University of Nicosia economist Marios Christou said the ECB’s rate increase had also been expected given its policy of keeping eurozone inflation close to, but below, 2 per cent. He explained that the resumption of hostilities in the Middle East, combined with the lack of any clear prospect of a short-term settlement to the conflict between the United States and Iran, was pushing oil prices higher. “This automatically has knock-on effects on production costs, transport costs and energy costs, pushing prices higher,” Christou said. He added that the purpose of raising interest rates was to curb consumption, although the policy could place ordinary consumers in a difficult position. Interest rate increases are normally used to tackle inflation when demand for goods and services is rising, he said, but the current situation was different because inflation was being driven primarily by higher costs rather than stronger demand. “Here we have an increase in inflation, not so much because of demand, but because of rising costs, or cost-push inflation,” Christou stated. He explained that higher energy costs push inflation upwards by increasing prices across the economy, with the effects spreading through production and transport costs and other related expenses. These pressures could also feed into labour costs, he said, as workers seek higher wages when they face rising prices. “Essentially, consumers are bearing a greater financial burden through this increase,” Christou said. “Life becomes more difficult, especially for those on low incomes because they have limited income, and for those with loans at floating interest rates because interest rates are also rising at the same time,” he added. Moreover, Christou pointed out that mortgage borrowers faced particular pressure because housing loans tend to involve large amounts and long repayment periods. “The problem arises with mortgages because the loan amounts are high and, particularly if repayment is over a long period, meaning it extends far into the future, the current interest cost increases by much more, so there is significant pressure,” he said. Looking ahead, Christou said Lagarde’s prediction that inflation would return to the ECB’s target by the end of 2027 suggested households could face an extended period of financial pressure. “We have more than 12 months of pressure ahead of us,” he said, referring to continued price increases and the resulting pressure on households. He mentioned that higher interest rates would add to the burden for households with loans by increasing their overall cost of living and substantially reducing their disposable income. “So these are the things we have been talking about, meaning a more difficult life for those who have little or no disposable income to spare,” Christou said. He concluded by saying that interest rates represented a broad-based measure whose cost was borne by everyone, regardless of their level of income or wealth.