Moody’s predicts Cyprus stagflation

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Price increases in Cyprus are likely to become permanent as the Ukraine war persists, warned rating agency Moody’s.

In a report on the impact of the ongoing war in Ukraine, the agency said that Cyprus, along with Malta, Portugal, Slovenia, and Croatia, are more vulnerable to inflation and more likely to see temporary price increases become permanent.

Moody’s also noted these countries have relatively low policy-making power.

It argued that Malta, Cyprus, and Portugal are among the most vulnerable, given their low scores for both inflation exposure (5th, 6th, and 7th) and policy options (19th, 24th and 20th), respectively.

Greece, Italy, and Romania have the least room for policymakers to deal with stagflation which sees rising prices and declining growth.

Three of the EU’s largest members, Italy, France, and Spain, appear essentially vulnerable, given the large increase in public debt during the pandemic and the fact they will spend significant sums on capital and interest next year.

It is highlighted that all EU countries are deviating from historical inflation trends, with current inflation at least 3.7 percentage points above the average inflation calculated over the last 10 years.

For the EU and the euro area, current inflation levels are 4.6 and 4.3 points above the ten-year average inflation rate.

The deviation in June was largest in Latvia, followed by the Czech Republic, Portugal, Sweden, and Denmark.

The lowest deviations were observed in the Netherlands, Cyprus, Romania, and Spain

Moody’s said that a stagflation scenario is now most likely in the EU as credit negative, but exposure varies by country.

“Southern Europe is more exposed to a stagnant inflation scenario,” it said.

According to Eurostat’s harmonized index data, inflation in Cyprus jumped to 10.6% in July from 9% in June. A year earlier, inflation was only 2.7%.

As for the eurozone, inflation rose to 8.9% from 8.6% in June.