Businesses in trade, tourism and real estate, along with low-income households, remain the most vulnerable parts of the Cyprus economy in the face of geopolitical turbulence, inflationary pressures and higher energy costs, the Central Bank of Cyprus said.
Despite a significant improvement in the balance sheets of businesses and households, and an increase in bank lending, the Central Bank warned that the uncertain international environment continues to create risks to financial stability.
According to the Central Bank’s Financial Stability Report, businesses in these sectors are more exposed to a potential slowdown in external demand, to rising operating costs driven by energy prices, and to the potential impact of a further escalation in Middle East conflicts.
These businesses also carry higher levels of debt and relatively limited cash reserves, the report added, which increases their vulnerability if economic conditions worsen.
By contrast, the report found greater resilience among businesses in information and communication, professional, scientific and technical activities, and transport and storage. These sectors have lower leverage and stronger cash reserves, according to the report, allowing them to cope more effectively with potential external shocks.
Despite the risks, the report said financing conditions remained strongly positive. Improved balance sheets for businesses and households, combined with a more favourable interest rate environment, led to a significant rise in new bank lending in 2025:
- New lending to businesses reached a record high of €3 billion
- New lending to households stood at €1.8 billion
The Central Bank said that despite this expansion in credit, banks continued to apply strict lending criteria, carefully assessing borrowers’ creditworthiness and limiting the risk of new non-performing loans.
Concern for households
The report found that a resilient labour market continued to boost household incomes in 2025, with average earnings rising faster than inflation. However, the improvement was not uniform. Lower-income households recorded pay growth of just 3.9%, compared with 7.1% for higher-income groups. This gap, the report said, limits lower-income households’ ability to strengthen their financial resilience.
At the same time, household expectations for their future financial situation worsened following the escalation of conflicts in the Middle East. The Central Bank estimated that a possible resurgence of inflation and rising borrowing costs could put additional pressure on households, particularly those with high debt or limited liquidity.
A positive development was the further increase in deposits, which serve as an important liquidity buffer in 2025:
- Business deposits rose by 17.5%, the highest annual rate since 2018
- Household deposits increased by 6.2%
This growth, the report said, strengthened the private sector’s resilience to potential future turbulence.
External risks
The report stressed that while the direct effects of US trade policy on Cyprus are expected to be limited, the indirect effects could be significant.
The main risks that could affect the Cyprus economy and, in turn, financial stability, include:
- A possible rise in energy prices
- New disruptions to supply chains
- A slowdown in economic activity among key trading partners
- A deterioration in the investment climate
