Following its meeting on July 23, the European Central Bank (ECB) decided to leave its key interest rates unchanged. The decision was fully in line with financial market expectations, as most analysts had predicted a pause in the monetary policy cycle.
The rates remained at the following levels:
- deposit facility rate — 2.25%;
- main refinancing operations rate — 2.4%;
- marginal lending facility rate — 2.65%.
According to market estimates, the probability that the ECB would keep rates unchanged stood at 95%, while the likelihood of an increase was assessed at just 5%. The ECB stressed that it continues to closely monitor inflation, energy prices and the state of the eurozone economy. Despite relative stabilisation, uncertainty remains high due to geopolitical developments and volatility in energy markets.
What is happening in the eurozone economy
According to the ECB, the first signs of a recovery in economic activity emerged in the second quarter. Positive momentum is being observed in several areas:
- the services sector is gradually recovering from the energy crisis;
- the digital economy continues to expand, partly due to the development of artificial intelligence technologies;
- the industrial sector remains resilient due to inventory accumulation and increased government defence spending.
At the same time, the labour market remains stable. In May, the eurozone unemployment rate stood at 6.2%, remaining close to its historic low. However, the regulator has also noted some concerning signals. The number of new vacancies continues to decline, while companies and households expect the labour market to weaken in the coming months. According to ECB forecasts, economic growth will remain moderate due to persistent risks associated with high energy prices and general uncertainty in the global economy.
Inflation is falling, but risks remain
In June, inflation in the eurozone slowed to 2.8%, compared with 3.2% a month earlier. Changes in the main categories were as follows:
- energy inflation fell from 10.8% to 8.5%;
- food price growth slowed from 1.9% to 1.5%;
- core inflation, excluding energy and food, declined from 2.6% to 2.4%;
- goods inflation stood at 0.7%;
- services inflation reached 3.2%.
Despite the improvement in the figures, ECB President Christine Lagarde warned that the effects of the energy crisis have not yet been fully reflected in the cost of goods and services. According to her, rising business costs are continuing to be gradually passed on to consumers.
The bank also believes that headline inflation may remain above the 2% target at least until the first half of 2027. The main risks include:
- volatility in global energy prices;
- geopolitical tensions;
- trade restrictions;
- extreme weather events, including prolonged heatwaves that could lead to higher food prices.
What will happen to interest rates next and how will this affect Cyprus
The ECB did not provide any signals regarding further changes to interest rates. Lagarde stressed that each future decision would be taken separately on the basis of new economic data. Financial markets are currently assessing the likelihood that the regulator may still change the direction of monetary policy in the coming months. According to current investor expectations:
- the probability of the rate reaching 2.5% in September stands at 84.2%;
- in October, the probability is 57.3%;
- by December, the probability of the rate reaching 2.75% is estimated at 47.7%.
ECB decisions are particularly important for residents of Cyprus. The European Central Bank’s key interest rates directly influence the cost of mortgages, deposit rates, bank financing conditions and activity in the property market. Following a series of rate changes in previous years, Cypriot banks have already begun gradually adjusting their loan and deposit terms. If inflation continues to slow and the economy remains stable, borrowing costs in the eurozone could become more predictable, which would have a positive impact on both homebuyers and businesses.