. at the same time, weakness in the cyprus gdp performance could be expected to become visible over the second half of 2022 and early 2023, primarily owing to the anticipated worsening in the international economic outlook. more specifically, the impact of the war is expected to be channelled directly, via the disruption in trade of services and the rise in commodity prices, as well as indirectly, via the impact on business and consumer confidence. our exposure to russia via the export of services is the most significant vulnerability, with the most important exposure relating to financial and other business services and, to a lesser extent, tourism and transport. 2 / 4 bis - central bankers'speeches in terms of inflation, the harmonised index of consumer prices ( hicp ) reached 9, 6 percent in august 2022 compared with 3, 3 percent in august 2021. for the period january - august 2022, inflation climbed to 8 percent, compared to 1, 2 percent in the same period in 2021. the spike in the domestic inflation is mostly attributed to the significant negative impact of the war, as well as the continued consequences of the pandemic. more specifically, the energy component is the largest contributor to the surging trend of domestic headline inflation ( with around 45 % share of hicp ). we expect that our domestic short - term inflation outlook will continue to remain, overall, at very elevated levels, similar to the euro area inflation developments, amid the ongoing significant uncertainty and volatility resulting from the war. more specifically, cyprus hicp inflation for 2022 has been revised upwards in our most recent projections, now reaching 8, 4 percent compared with 7, 0 percent in the cbc june 2022 projections. banking sector n this ever changing and uncertain economic environment, the cyprus banking sector is proving resilient, exhibiting a solid and healthy financial standing. the solvency position, as measured by the common equity tier 1 ratio was edging up to 17, 5 percent in the second quarter of 2022, a level higher than the respective european average of 15, 2 percent. the liquidity coverage ratio, indicating the availability of liquid funds against deposit outflows over a 30 day stressed period, stood at the level of 320 percent in july 2022 which is more than 3 times higher than the minimum requirement of 100 percent, placing cyprus amongst the most liquid banking sectors in the union, where the average lcr amounts to 168 percent. the non - performing loan ratio has continued its downward trend despite the

seen in a generation. the combination of a fall in risk - free returns, and large amounts of capital looking for a home in western capital markets, created a demand for assets offering higher returns – the socalled search for yield. investors, including banks, overlooked the fact that higher returns could be generated only by taking higher risks. as a result, money was lent on easier terms. that helped to push up further asset prices that had already risen as real interest rates were falling. it also led to an explosion in the size of the financial sector as new instruments were created to satisfy the search for yield. as well as lending to households and businesses, banks lent to other banks which bought ever more exotic instruments created by the financial system itself. the effect was to replicate the original risky loans many times over. over the past five years, the balance sheets of many of the world ’ s largest banks more than doubled. from the early 1990s to the start of the financial turmoil in 2007, total debt in the uk relative to gdp almost doubled. around two - thirds of the increase in total debt was accounted for by lending to the financial sector. a marked expansion in debt of the financial sector also occurred in the united states and the euro area. the bank did not stand idly by during this period. the monetary policy committee set bank rate to achieve the inflation target. monetary policy – here and in our major partners – was successful in controlling inflation and maintaining economic stability. from the early 1990s until the onset of financial turmoil in 2007, output growth, both here and in the industrialised world in general, was close to its long - run average. moreover, through our regular publications and speeches on financial stability the bank highlighted the dangers posed by the growth in the size and complexity of the financial sector. nevertheless, it is clear that policy did not succeed in preventing the development of an unsustainable position. some have suggested as a result that bank rate be directed not only at meeting the inflation target but also at preventing excessive increases in debt and asset prices. leaving to one side the feasibility of targeting the latter, the obvious question is how one can meet two objectives with one instrument. the answer of course is by accepting a trade - off between the two objectives. but why should we accept unemployment or high inflation in order to reduce financial imbalances? it would be more sensible to use bank rate for its traditional task of targeting inflation to maintain a balance between demand and supply in the economy, and