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CBC Governor: Growth to decelerate, inflation to spike due to geopolitical tensions

23/05/2022 09:33

The economic growth in Cyprus this year is estimated to decelerate to 2.3% of the GDP from the previous estimate of 3.6%, while inflation is forecasted to more than double of this initial projections, due to the negative geopolitical developments associated with the war in Ukraine, Constantinos Herodotou, Governor of the Central Bank of Cyprus, has said.

“In relation to the growth of the economy in 2022 and taking into account the new negative geopolitical developments, GDP growth of around 2,3% is expected, compared to an increase of 3,6% estimated in December 2021,” Herodotou said, in the introduction of the CBC’s annual report for 2021

Furthermore, Herodotou pointed out that taking into account the negative geopolitical developments, inflation is expected to rise to around 6.8%, compared to 2.5% estimated in December 2021.

On the banking system, Herodotou said that the Cypriot banks continued deleveraging their balance sheets reducing their non-performing loans, noting that despite the deleveraging in 2021 the size of the island’s baking system increased due “to the increase of liquid assets as a result of the increase in deposits totaling around €51,5 billion in 2021, which is the highest level recorded after the 2013 crisis.”

However, Herodotou pointed out that the banks’ new challenge is associated with the management of risks from the climate change and the goal/agreement of states to reduce carbon dioxide emissions, recalling that the European Central Bank has issued guidelines in November 2020 setting out its expectations on how credit institutions should manage the risks of climate and environmental change on their balance sheets and their reputation.

He added that significant credit institutions will participate in 2022 in a stress test exercise carried out by the ECB on the risks arising from climate change.

Moreover, Herodotou said that even the less significant institutions (the banks supervised only by the CBC) should assess and implement the guidelines, taking into account the principle of proportionality.

The CBC, he added, has already requested the less significant credit institutions to carry out an assessment of their readiness to implement these guidelines.

“Therefore, the management of climate change risks is an additional challenge for credit institutions, on top of the already existing ones, such as the resolution of non-performing loans, the need to adjust their business models and the development and implementation of digitalization,” he said.