The European Central Bank (ECB) held its key deposit rate steady at 2% for a second consecutive Monetary Council meeting on Thursday, as eurozone policymakers assess the economic impact of the recent trade agreement between the EU and the United States.
In parallel, the ECB’s Governing Council revised its growth projections for the eurozone economy, with updated forecasts painting a more optimistic picture for 2025. According to the ECB’s latest projections, the eurozone is now expected to grow by 1.2% in 2025 — a notable upward revision from the 0.9% forecast in June. Growth for 2026 has been adjusted slightly downward to 1.0%, while the projection for 2027 remains unchanged at 1.3%.
The combination of steady interest rates and improved growth forecasts contributes to a more favourable macroeconomic environment for Cyprus, whose economy remains closely tied to eurozone-wide trends.
The decision was broadly in line with economists' expectations and followed comments by ECB President Christine Lagarde in July that the central bank had entered a phase of “wait and watch” following eight consecutive rate cuts.
The US-EU Trade Agreement
Thursday’s decision marks the first rate-setting meeting since the trade deal was signed with US President Donald Trump at the end of July. However, within the ECB’s Governing Council, views are divided over the expected impact of the agreement — which introduced 15% tariffs on most goods imported from the eurozone.
Isabel Schnabel, a member of the ECB’s Executive Board, described the US tariffs as “clearly inflationary,” while Finnish central bank governor Olli Rehn told the Financial Times in August that the deal is likely to weigh on both growth and inflation in the coming quarters.
Lagarde cautiously optimistic
Despite external uncertainties, ECB President Christine Lagarde expressed cautious optimism regarding the growth outlook for the eurozone. She pointed to reduced risks following recent trade developments with the United States, which, according to her, are already reflected in improved forecasts for the near term.
“Risks to economic growth have become more balanced,” Lagarde said during a press conference. “While recent trade agreements have reduced uncertainty, a renewed deterioration in trade relations could further slow exports, reduce investment and consumption, and tighten financial conditions. A worsening in market sentiment could lead to greater risk aversion and weaker growth,” she warned.
Lagarde also highlighted ongoing geopolitical tensions as a key source of concern, citing Russia’s war of aggression against Ukraine and the tragic conflict in the Middle East. On the other hand, she noted that higher-than-expected spending on defence and infrastructure, combined with productivity-enhancing reforms, could help support growth in the medium term.
Inflation outlook remains uncertain
ECB staff project that headline inflation will average 2.1% in 2025, followed by 1.7% in 2026 and 1.9% in 2027. Core inflation — which excludes volatile energy and food prices — is expected to average 2.4% in 2025, declining to 1.9% in 2026 and 1.8% in 2027.
Nevertheless, Lagarde stressed that inflation forecasts remain “more uncertain than usual” due to the unstable global environment. A stronger euro, she noted, could help bring inflation down more quickly than expected.
Furthermore, inflation could ease further if the new US tariffs reduce demand for eurozone exports and prompt surplus-producing economies to redirect exports toward the EU market, increasing competition and putting downward pressure on prices.
