Little is known about the impact of exacerbations on COPD progression or whether inhaled corticosteroid (ICS) use and blood eosinophil count (BEC) affect progression. We aimed to assess this in a prospective observational study. The study population included patients with mild to moderate COPD, aged ≥35 years, with a smoking history, who were followed up for ≥3 years from first to last spirometry recording using two large UK electronic medical record databases: Clinical Practice Research Datalink (CPRD) and Optimum Patient Care Research Database (OPCRD). Multilevel mixed-effects linear regression models were used to determine the relationship between annual exacerbation rate following initiation of therapy (ICS vs non-ICS) and FEV decline. Effect modification by blood eosinophils was studied through interaction terms. Of 12178 patients included (mean age 66 years; 48% female), 8981 (74%) received ICS. In patients with BEC ≥350 cells/µL not on ICS, each exacerbation was associated with subsequent acceleration of FEV decline of 19.4 mL/year (95% CI 12.0 to 26.7, p<0.0001). This excess decline was reduced by 15.1 mL/year (6.6 to 23.6) to 4.3 mL/year (1.9 to 6.7, p<0.0001) in those with BEC ≥350 cells/µL treated with ICS. Exacerbations are associated with a more rapid loss of lung function among COPD patients with elevated blood eosinophils, defined as ≥350 cells/µL, not treated with ICS. More aggressive prevention of exacerbations using ICS in such patients may prevent excess loss of lung function.