The European Central Bank’s decision to keep interest rates unchanged at 2% at its final meeting of the year signals a continued commitment to fighting inflation, even as growth across the euro area remains uneven. As 2026 approaches, it appears that rates have reached near the bottom of the cycle — the ECB are unlikely to cut rates any further unless there is a major downturn in the European economy.
In Germany, Europe’s largest economy, where manufacturing and exports have struggled to regain momentum, the absence of further rate relief may delay a recovery in industrial investment. Business confidence is likely to remain cautious, particularly given ongoing uncertainty around global trade and demand.
In France, holding rates keeps pressure on household spending and service-sector activity. Consumer confidence is likely to remain fragile, limiting the scope for a strong domestic-led recovery in the near term.
For Italy, the implications are more acute. With rates not likely to drop below 2% any time soon, this applies sustained pressure to public finances and constrains lending to small and medium-sized firms. While stability is preserved, growth prospects for 2026 remain subdued without easing in financing conditions.
Spain, which has outperformed many peers, may see momentum soften to some extent as rate-cutting stalls. Stronger fundamentals at the heart of the economy offer some insulation, but growth is unlikely to accelerate meaningfully without looser monetary conditions.
On inflation, the ECB’s stance reflects caution about another potential spike, particularly in services prices and wage growth. While energy-related inflation has eased, underlying pressures remain inconsistent with the central bank’s inflation target. If the inflation landscape were to change, the ECB will be poised to enact more restrictive monetary policy.
As the Eurozone enters 2026, the message from Frankfurt is clear: stability is the name of the game ends.
Professor Joe Nellis
Savvas Klitou, Regional Managing Partner, Head of Tax Services, Baker Tilly Cyprus is commenting on the current stage and the possible outcomes.
If rates remain stable
For Cyprus, stable rates mean predictable financing conditions, supporting investment and consumption without sudden cost changes. Growth is forecast to improve to 3.2% in 2026, aided by low borrowing costs whereas inflation is projected at 1.8%, aligning with ECB targets. Businesses and households benefit from certainty: mortgage and loan rates remain low, encouraging real estate and corporate investment.
In the unlikely case there is a rate cutThe ECB rate cut provides Cyprus with a supportive backdrop for growth, easing credit conditions for households and businesses while reinforcing investment in key sectors. Combined with low inflation and solid fiscal fundamentals, this move helps maintain economic resilience amid global uncertainties.
