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. the cyprus banking sector let me now give you a brief overview of the banking sector developments in cyprus. the banking sector exhibits a healthy financial standing, with solid solvency and liquidity buffers. the solvency position, as measured by the common equity tier 1 ratio amounts 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 august 2022 which is more than 3 times higher than the minimum regulatory requirement of 100 percent, placing cyprus amongst the most liquid banking sectors in the union, where the average lcr amounts to 165 percent. the non - performing loan ratio has continued its downward trend and stands at 11. 2 3 / 4 bis - central bankers'speeches percent as at june 2022, with total non - performing loans amounting to a ‚ ¬2. 9 billion, which is the lowest level observed since 2014 when the definition was harmonised across the european union. so far the first round effects from the geopolitical crisis have been manageable and of limited direct extend. nevertheless, the second round effects are yet to be materialised. adverse macroeconomic developments may weaken banks'profitability and deteriorate asset quality, causing delinquencies and an upward pressure on impairments and provisions. it is therefore important for banks to adapt their business models to the new realities as shaped by the consecutive crises. challenges emerge through various channels. intense competition, from entities not falling in the traditional banking spectrum, threat of additional provisions due to increased credit risk, the need to invest in digitalisation to streamline operations, and the costs of managing climate change and the

constantinos herodotou : developments in the monetary policy of the european central bank and the cyprus banking sector speech by mr constantinos herodotou, governor of the central bank of cyprus, at the 2nd mediterranean finance summit, limassol, 18 may 2023. * * * cyprus, and the euro area at large, have been hit by successive and persistent global shocks over the past three years, that have caused an exceptionally high level of uncertainty, an economic slowdown and immense inflationary pressures. our exit from the first shock of the pandemic - related supply chain disruptions, was abruptly interrupted by russia's war in ukraine and the subsequent energy crisis it caused, that fueled significant inflation pressures globally. despite the current disinflation path in headline inflation, price increases have now become broader and more persistent in the underlying inflation dynamics, that is, inflation excluding energy and food. this is due to the continuous pass - through of past energy cost pressures to other sectors of the economy, such as manufacturing and services. in my speech today, i will briefly explain the current european central bank ( ecb ) monetary policy, analyse the economic activity in cyprus, and then focus on the developments as well as other major challenges in the cyprus banking sector. the ecb monetary policy inflation rose sharply and became persistent in the eurozone. therefore a substantial rise in interest rates was initiated by the ecb in order to ensure the timely return of inflation to the 2 % medium - term target. for the most recent interest rate rise, the governing council of the ecb decided in early may to raise the three ecb key interest rates by a further 25 basis points. this was the seventh consecutive rate hike since last july, comprising a total increase of 375 basis points from - 0. 50 % to 3. 25 %. it was also decided last may that bond reinvestments under the asset purchase programme are expected to be discontinued as of july 2023, thus further aligning all of ecb's monetary instruments in fighting against persistent inflation. currently, monetary policy is in the restrictive territory, as reflected in the significant tightening of the financing conditions. even though headline inflation is declining, and financing conditions are tighter, there is still a lot of uncertainty. this is the main reason that a data - dependent approach on future policy rate decisions is required - in order to assess the headline and core inflation outlook on the basis of the incoming economic and financial data, the dynamics of underlying inflation