BERLIN, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points on Thursday, reflecting persistent inflation pressures. The ECB indicated that the conflict in the Middle East continues to exert upward pressure on prices throughout the euro area. The deposit facility rate will be raised to 2.50% from 2.25%. The main refinancing rate will go up to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will come into effect on September 16, 2026.
Inflation remains above the ECB’s medium-term target of 2%, and officials warn it could stay elevated for a prolonged period. In August, euro area headline inflation increased to 3.3%, up from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation held steady at 1.2%. Meanwhile, inflation excluding energy and food slightly eased to 2.4% from 2.5%, and services inflation dropped to 3.0% from 3.3%.
Alongside the rate decision, the ECB released updated economic projections. Staff now anticipate that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The forecast projects inflation at 2.1% in 2028. The 2026 outlook remained unchanged from June, but estimates for 2027 and 2028 have been raised. Inflation excluding energy and food is forecasted at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Rises as Energy Prices Grow
ECB President Christine Lagarde noted that higher energy costs have pushed the projected inflation path upward. The central bank expects headline inflation to remain significantly above its target into the first half of 2027. It also anticipates energy inflation will decline afterward and turn negative during parts of 2028. The ECB stated that the increase in energy prices should gradually influence core and food inflation. According to the central bank’s latest assessment, most longer-term measures of inflation expectations hover around 2%.
Economic growth forecasts have also been revised upward from previous estimates. The ECB staff now projects the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 have been raised from June’s projections. The central bank attributes these upward revisions mainly to stronger-than-expected economic resilience. In July, euro area unemployment remained steady at 6.4%, even as employment and labor force growth slowed and productivity gradually improved.
Rate Hikes Influence Borrowing Conditions
Following earlier monetary tightening, borrowing costs have already increased. Bank lending rates for businesses stood at 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates remained at 3.5% in June and July. In July, annual growth in bank lending to companies rose to 4.4%, whereas growth in mortgage lending slowed to 3.0%, as reported by the ECB.
The Governing Council emphasized that upcoming interest rate decisions will depend on incoming economic and financial data. It will also evaluate the inflation outlook, underlying price pressures, and how monetary policy transmissions are progressing. The council did not specify a predetermined path for future rates. Its asset purchase and pandemic emergency purchase portfolios continue to decline as the Eurosystem stops reinvesting principal from maturing securities. The ECB reaffirmed its commitment to maintaining monetary policy aimed at restoring inflation to the 2% target in a sustainable manner over the medium term.