The European Banking Authority (EBA), working alongside the European Systemic Risk Board, has published macroeconomic scenarios for the 2025 EU-wide stress test. These scenarios are designed to evaluate the resilience of banks in Cyprus against potential economic and financial shocks while identifying systemic risks within the sector.

The framework includes both baseline and adverse scenarios to project economic trends. Under the baseline projection, Cyprus is expected to see economic growth of 3% in 2025, 3.1% in 2026, and 3% in 2027. Conversely, the adverse scenario paints a more challenging picture, forecasting a 2.5% economic contraction in 2025, a deeper decline of 4.7% in 2026, and a modest recovery of 0.7% in 2027. The growth estimate for 2024 is set at 3.7%, based on historical data.
Unemployment rates are expected to remain stable under the baseline scenario, decreasing slightly from 4.9% in 2025 to 4.6% by 2027, reflecting near full-employment conditions. However, the adverse scenario anticipates unemployment climbing to 8.3% in 2025, peaking at 11.8% in 2027.
Inflation rates under the baseline scenario are projected to remain moderate, at 1.9% in 2025, 2.1% in 2026, and 2% in 2027. In the adverse scenario, inflation is expected to rise to 2.7% in 2025, followed by 2.1% in 2026 and 2.3% in 2027.
Residential property prices, which have historically grown at a rate of 7.1%, are projected under the baseline scenario to increase by 4.7% in 2025, 3% in 2026, and 2.5% in 2027. The adverse scenario, however, predicts sharp declines, with prices dropping by 3.4% in 2025, 9.5% in 2026, and 6.1% in 2027.
Commercial real estate prices under the baseline scenario are expected to see modest gains, with increases of 2.3% in 2025, 1.1% in 2026, and 0.7% in 2027. Meanwhile, the adverse scenario anticipates significant declines, with prices falling by 8.6% in 2025, 14.7% in 2026, and 11.6% in 2027.
Interest rates are forecast to remain relatively stable in the baseline scenario, with long-term rates projected at 2.96% in 2025, 3% in 2026, and 3.05% in 2027. By contrast, the adverse scenario predicts a rise in long-term interest rates, reaching 4.87% in 2025, 4.49% in 2026, and 4.21% in 2027.
The purpose of these stress test scenarios is to provide a hypothetical analysis of how the banking sector in Cyprus would respond to adverse economic conditions, such as financial shocks or systemic risks. These scenarios are not predictions of actual events but are intended to ensure that financial institutions across the EU remain robust and prepared for potential challenges.
It is important to note that the baseline macroeconomic scenario is based on the December 2024 forecasts from the national central banks within the EU. The EBA’s stress test scenarios are a key tool in safeguarding the stability of the banking sector and ensuring the sector’s resilience against future uncertainties.
By fLEXI tEAM
Comments