The European Banking Authority (EBA), in coordination with the European Systemic Risk Board, has released macroeconomic scenarios to assess the resilience of banks in Cyprus as part of the EU-wide 2025 stress test.
The scenarios, which include baseline and adverse projections, aim to evaluate the financial sector’s ability to withstand negative economic and financial shocks while identifying systemic risks.
Under the baseline scenario, Cyprus’ economy is projected to grow by 3 per cent in 2025, 3.1 per cent in 2026, and 3 per cent in 2027.
Conversely, the adverse scenario foresees a contraction of 2.5 per cent in 2025, followed by a steeper decline of 4.7 per cent in 2026, before a modest recovery of 0.7 per cent in 2027.
Growth for 2024 is estimated at 3.7 per cent, based on historical data.
Unemployment and inflation projections
Unemployment is expected to remain steady under the baseline scenario, dipping slightly from 4.9 per cent in 2025 to 4.6 per cent by 2027, maintaining conditions of full employment.
However, the adverse scenario predicts significant increases, with unemployment climbing to 8.3 per cent in 2025, peaking at 11.8 per cent in 2027.
Inflation under the baseline scenario is forecast at 1.9 per cent in 2025, 2.1 per cent in 2026, and 2 per cent in 2027.
The adverse scenario anticipates higher inflation, with a peak of 2.7 per cent in 2025, followed by rates of 2.1 per cent in 2026 and 2.3 per cent in 2027.
Housing and commercial property prices
Residential property prices, which historically grew at a rate of 7.1 per cent, are expected to rise under the baseline scenario by 4.7 per cent in 2025, 3 per cent in 2026, and 2.5 per cent in 2027.
The adverse scenario predicts sharp declines, with prices dropping by 3.4 per cent in 2025, 9.5 per cent in 2026, and 6.1 per cent in 2027.
For commercial real estate, the baseline scenario anticipates modest gains, with prices increasing by 2.3 per cent in 2025, 1.1 per cent in 2026, and 0.7 per cent in 2027.
Meanwhile, the adverse scenario foresees significant declines of 8.6 per cent in 2025, 14.7 per cent in 2026, and 11.6 per cent in 2027.
Interest rate trends
Interest rates are projected to remain stable under the baseline scenario, hovering near current levels.
Long-term interest rates are expected to be 2.96 per cent in 2025, 3 per cent in 2026, and 3.05 per cent in 2027.
In contrast, the adverse scenario projects a rise in rates, with long-term interest rates reaching 4.87 per cent in 2025, 4.49 per cent in 2026, and 4.21 per cent in 2027.
Purpose of the scenarios
The stress test scenarios serve as a hypothetical analysis of how the banking sector would respond to negative economic conditions, such as systemic risks or financial shocks.
These scenarios are not predictions of likely events but tools to ensure the robustness of financial institutions across the EU.
Finally, it should be noted that the baseline macroeconomic scenario relies on the December 2024 forecasts of national central banks in the EU.
