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 € 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 transition towards a sustainable greener economy are among the challenges that the Cyprus banking sector faces. It is important to say that these challenges are not country specific to the banking system of Cyprus. They are challenges that are commonly faced by European banks. Especially the issues of digital transformation together with the management of climate risks and the transition to a green economy are key issues that should be on top of the agendas' of European economies and banks. They surely are on the top of the supervisory agenda.
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. 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.