ECB prepares for rate hikes: new risks for the Cyprus economy

The European Central Bank, according to Reuters sources, may raise key interest rates at least twice by the end of the year. The first step is expected as early as June if current economic conditions, including high energy prices, persist.

Despite the regulator keeping rates unchanged at its last meeting, concern over inflation is mounting within the ECB. The main pressure factor remains oil and gas supply disruptions through the Strait of Hormuz amid the conflict in Iran, leading to rising costs across the eurozone.

According to sources, if oil prices remain above $100 per barrel, a scenario of monetary policy tightening becomes practically inevitable. Within the ECB, the need for rate hikes has already been discussed, and a consensus on the matter is gradually forming.

At the same time, a possible diplomatic resolution of the conflict between the US and Iran could change the situation and reduce pressure on prices, which, in turn, would influence the regulator's decisions.

What this means for Cyprus

For Cyprus, a possible rate hike carries several risks. Above all, it means more expensive loans — for both businesses and individuals. Mortgage and consumer loans may become less accessible, reducing consumption levels and investment activity.

Furthermore, rising rates could slow economic growth, especially in sensitive sectors such as construction and small business. Against the backdrop of already rising energy and commodity prices, this will increase pressure on households.

On the other hand, a higher rate could help curb inflation in the medium term, though the effect on the economy will be mixed. Experts note that for Cyprus, as a small economy dependent on external factors, the combination of expensive energy and expensive money could pose a serious challenge in the coming months.