Interview of the Governor of the Central Bank of Cyprus to Econostream
28 July 2026
Q: Governor, what convinced you and your colleagues that last week’s hold was the better option?
A: There was no evidence that would have supported a rate hike. Second-round effects are not evident; expectations are anchored. So far, inflation is more or less in line with its expected path. In fact, the last figure came out a bit lower. So, there was no real reason to decide to hike. But obviously, given what is going on with energy prices, inflation risks are on the upside. We are worried and need to monitor developments diligently and in depth. This is where we stand.
Q: Are you in the camp of Governor Peter Kažimír, who said yesterday that he would need very convincing evidence not to support a hike in September?
A: The conflict has been going on for five months now. There are ups and downs in the discussions between the United States and Iran, and we cannot project the future as far as geopolitics are concerned. That said, the passage of time definitely works against us on inflation, in that higher oil prices may filter into other products, which could lead to generally higher prices. So, it is not unreasonable today to say that if this continues, the risk is further to the upside. The risk accumulates.
Q: Things improved considerably at one point about a month ago; the shock we thought would be persistent unwound with surprising speed. What is the lesson when it comes to setting policy now?
A: There could also be another shock on the opposite side, in which case the oil price would go up as rapidly as it fell. These short-term fluctuations are observable and we take them into consideration, but the question is what they mean for the medium term. They do not determine the outcome. One must assess their impact over the medium term.
Q: It sounds as though you might disagree with the idea that, all else equal, if we get another ceasefire, we should hesitate about changing the policy stance, since the shock could unwind.
A: It is not a matter of agreeing or disagreeing. Various factors affect inflation, so it depends on the direction of each factor. Suppose something is inflationary; something else might not be and could have the opposite effect. One has to look at the whole set of data before assessing and deciding.
Q: Would you say the outlook is now broadly back to where it was after the June meeting?
A: In terms of the scenarios, it is nearer to the baseline scenario than anything else. But that does not say much to my mind, because the scenarios themselves could change or be updated.
Q: Does the fact that a number of hikes are embedded in the forecast obligate the ECB in any way?
A: Of course not. Take an exaggerated situation: suppose the oil price drops; suppose there is no evidence that it has filtered into the rest of the economy; and suppose that, because of what is happening, there is a slowdown in the global economy. There would be no reason to hike, and by then the yield curve might have changed shape. One cannot be dependent on today’s yield curve.
Q: As you consider developments relevant to the next monetary policy decision, are there some that you would regard as especially likely to lead you in one direction or the other?
A: Evidence of second-round effects. What I always want to see is granularity. To what extent, in this case, is the price of oil affecting goods derived from oil? The crack spread is important. Then, to what extent do those goods find their way into input prices? The PMI is important. Then, do those effects feed through to consumer goods and consumer expectations, and later into wages and so on? I am very much looking at this path. This is where my focus is.
Q: Where are we along that path?
A: The price of oil has gone up. The prices of oil-related products have gone up. Costs have gone up. The PMI is up. That is where we are. But this is static; it is what we observe today. On that basis, one must assess the impact in relation to our medium-term target. One needs not only more information about the propagation to the rest of the economy; one must also understand the medium-term impact. Of course, I also take into consideration all the other aspects that enter our reaction function. This is not an everyday situation. It is not normal to have a war, and to have this sort of war. That is why we insist that the uncertainty is unprecedented. It is all the more important that we do not give forward guidance, because this is a situation that is very difficult to assess.
Q: At times there seems to be a conflict between the idea that we should wait until we see actual second-round effects and the view that it is the risk of those effects that matters.
A: One needs to be ahead of the curve. The question is whether one should act pre-emptively. In June, we did not act merely pre-emptively. We had data that justified the rate hike, and we hiked. In September, we do not know what data we will have. But as time passes, as I mentioned earlier, the risk is increasing. The balance between the evidence we have and the value of being pre-emptive is shifting as the risk rises. For example, given prices have been higher for some time, there may be some filtering into parts of the economy not easily observed. So, as more time passes without a resolution of the situation, and prices remain elevated, being pre-emptive gains in importance.
Q: One gets the impression that it all comes down to oil. The account of the last meeting noted the close relationship between market expectations and oil prices. It is as though oil is replacing the ECB’s reaction function. Is the relationship becoming too narrow?
A: I was thinking about this when we were discussing it at the meeting. In the current situation, it is only natural that we discuss oil to a greater extent than otherwise. In any case, we are disciplined enough to go through all three pillars of the reaction function. It turns out that, in some of the pillars—take the transmission mechanism—there has been very little change since June. So, one need not spend much time discussing whether lending is becoming more constrained. It is therefore only natural that more time is spent on the oil price. Put another way, the oil price has gained importance out of necessity, not because our discussion or focus has become narrow. The emphasis is explained by what has, or has not, changed in the other parameters.
Q: Speaking of things that show up in inflation, how concerned are you that food will become a more pronounced contributor to price pressures in a few months?
A: Food commodity prices have risen dramatically over the last few months, but I am not convinced that oil prices and fertilizer costs per se explain everything about the changes in food prices. I do not have a strong view on projected food prices, and it is not something that worries me for now.
Q: With regard to domestic inflation, is there a particular component of primary concern?
A: With the exception of energy, gas and oil, I am not seeing cost-push inflation. On wages and the wage trackers, there is nothing there. On the demand side, one always worries about the fiscal situation. There is not much fiscal space. On the other hand, deficits have gone up. Given the political situation in Europe and the need to boost defense spending, this is something that could potentially give rise to inflation. It could be a difficult situation because, as I mentioned, there is no fiscal space. This could lead to something very difficult to manage. Other than that, I do not see much in terms of inflationary pressures. If anything, my impression is that wage demands are contained.
Q: The ECB is no longer providing forward guidance. What would be lost if the ECB started indicating the likely direction of policy again, subject to conditions?
A: Honesty, flexibility and credibility. Honesty, because why would we guide someone in a particular direction when we do not feel comfortable about that direction, given the level of uncertainty? In my view, one should not guide anyone toward a place that may not materialize, given the elevated uncertainty. It also diminishes flexibility. If we guide people somewhere and circumstances change, we may find yourself in a situation in which we lose credibility. At the end of the day, those are the things at stake.
Q: That is a strict standard. It probably would have ruled out even President Lagarde’s comment in April that, directionally, she thought she knew where things were going, which was understood as a fairly clear hint about tightening in June.
A: I would not do that. It is not a matter of taking a risk. I may have a view or a feeling, but that does not mean I should convey it to the market, because one should not base decisions on feelings.
Q: The world may remain volatile and uncertain. Would that mean that the ECB never returns to communicating more clearly about its intentions?
A: Not necessarily. If volatility becomes entrenched, and if at some point it turns out that guidance would be helpful as a tool for managing inflation, then one could provide such guidance. But at this point I do not see any benefit from forward guidance.
Q: Are we in restrictive territory at the moment?
A: I would say neutral to restrictive. Overall, I think we are at the right level. Let us see.
Q: Do you think the current environment calls for restrictiveness?
A: No. Interest rates are where they are supposed to be, given the latest situation, information and assessment. Tomorrow may be a different day. But, again, as time passes, given the energy crisis and the natural propagation process, the risk of inflation is higher every day. That is where I start from. But that does not mean that something else might not offset an increase in inflation. It might.
Q: President Lagarde said that the minimum reserve requirement was not discussed, but that it would be discussed. Should it be increased, and more generally, should such a discussion be separate from the review of the operating framework or take place within that review?
A: It has not been discussed. My own view is that this should be discussed within the operating framework review. It is not related to monetary policy per se or to the interest rates per se. As for the level of reserves, I have an open mind, but I prefer not to think about it before I am presented with the analysis and all the factors that will play into it. The minimum reserve level is, at the end of the day, a function of the operating framework, and decisions will be made on that basis.
Q: And speaking of the operating framework review, are you in any hurry to see that discussion take place? Would it be better to wait for the policy environment to calm down somewhat?
A: A particular timeframe was agreed for assessing the operating framework. I understand that the teams will start working on it in the autumn. If I had to announce a change in the framework today, I would very much prefer not to. Suppose the work had begun a year ago and the change were ready to be announced today: announcing it now might cause confusion, given the volatility and uncertainty. This is not the ideal time to announce something. Hopefully, by the time we are ready, the situation will have calmed down somewhat.
Central Bank of Cyprus - Interview of the Governor of the Central Bank of Cyprus to Econostream