Cypriot economists warn Middle East war could prompt further ECB rate rises
Cypriot economists said worsening conflict in the Middle East could raise oil prices, prolong inflation and lead to further European Central Bank interest rate increases.
Nicosia, Cyprus. Cypriot economists have warned that the European Central Bank could raise interest rates further if the war in the Middle East worsens, driving oil prices higher and extending inflationary pressures.
They said the ECB’s expectation that inflation would return to its 2 per cent target by the end of 2027 indicated that price pressures could persist for a prolonged period.
Impact of higher oil prices
Speaking to the Cyprus News Agency on Friday, University of Cyprus economist Sofronis Clerides said the ECB’s latest interest rate increase had been expected in view of inflation trends 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 rates would raise borrowing costs, discourage investment and increase loan repayments for borrowers with floating-rate loans, adding pressure to 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.
Inflation outlook
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 indicated the ECB’s expectations for inflation.
“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 higher interest rates would take time 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 said.
ECB policy target
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.
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