Small businesses and borrowers in Cyprus face a fresh squeeze from an expected European Central Bank rate hike on Thursday, economist Tassos Yiasemides has warned, with the eurozone showing signs of stagflation.
Countries like Cyprus and Greece, where the economy relies heavily on small businesses, could feel the effects most sharply, Yiasemides told CNA. Higher borrowing costs could force small and medium-sized firms to delay investment, cut hiring and reduce output, he said.
Borrowers with variable-rate loans face the biggest hit, Yiasemides said. When loan repayments go up, people have less money to spend, cutting demand across retail, hospitality, tourism and other sectors. The rising cost of living and higher loan obligations weigh most heavily on low and middle incomes, he said, with young workers, families with children and small business owners seeing their purchasing power fall steadily.
Yiasemides said he considers the rate increase a certainty, driven by persistent inflation and ongoing pressure on the European economy. Inflation has come down from the historic highs of recent years but remains above the ECB’s 2 per cent target, he said, citing the latest Eurostat figures. The ECB believes strict monetary policy is needed as long as prices stay high, even if that slows economic activity.
He said there are fears the eurozone risks entering a period of stagflation, where high inflation, low growth and rising unemployment exist at the same time. The European economy already shows several signs: industrial output is slowing across many countries, investment is falling, consumer confidence remains low, and the prices of energy, food and other essentials continue to eat into household budgets.
Stagflation is one of the hardest economic problems to tackle, Yiasemides said. Raising rates to bring down prices hurts economic activity, while loosening monetary policy to support growth risks pushing inflation back up. In this environment, another rate hike could make things worse by further tightening liquidity and pushing up the cost of financing for businesses and households, he said.
Uncertainty about the future is also affecting public confidence, with people cutting spending further, creating a vicious cycle of low growth and weak consumption, he said.
Yiasemides also pointed to rising oil prices, which he said have a direct effect on transport and production costs. Higher fuel prices push up the cost of moving goods, and that cost is passed on to consumers. Many industries also use oil and petroleum products as raw materials, making energy price rises all the more significant.
Natural gas is equally critical, particularly for electricity generation and heating, he said. Many economies have become increasingly dependent on gas as a relatively cleaner energy source, but that dependence creates vulnerabilities when markets are disrupted by geopolitical crises. Higher gas prices feed directly into electricity costs for businesses and households.
Yiasemides said the coming months will show whether the international community can limit the effects of the energy crisis through the gradual restoration of oil and natural gas production and supply.
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