BERLIN, GERMANY / RankWire.AI / – European Central Bank announced a 25 basis point increase in its three key interest rates on Thursday, citing persistent inflationary pressures. The bank highlighted that the ongoing conflict in the Middle East continues to exert upward pressure on prices across the euro area. As a result, the deposit facility rate will move up to 2.50% from 2.25%, the main refinancing rate will rise to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will become effective on September 16, 2026.
inflation remains above the ECB’s medium-term target of 2%, with projections indicating it could stay elevated for an extended duration. In August, euro area headline inflation increased to 3.3% from 2.9% in July. Energy inflation climbed to 14.3%, up from 10.3% in July, while food inflation remained steady at 1.2%. Inflation excluding energy and food decreased slightly to 2.4% from 2.5%, with services inflation dropping to 3.0% from 3.3%.
The ECB also released updated economic forecasts alongside the rate decision. They now expect headline inflation to average 3.0% in 2026 and 2.5% in 2027, with a further decline to 2.1% in 2028. The forecast for 2026 remains unchanged from June, but estimates for 2027 and 2028 have been revised upward. Inflation excluding energy and food is projected at 2.5% for 2023, 2.6% for 2027, and 2.3% for 2028.
Rising Energy Prices Push Inflation Outlook Higher
ECB President Christine Lagarde stated that increased energy costs have raised the projected inflation trajectory. The central bank anticipates that headline inflation will remain significantly above the target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative during parts of 2028. The ECB indicated that elevated energy prices should gradually influence core and food inflation, with most longer-term inflation expectation measures holding steady around 2%, according to the latest assessment.
Economic growth estimates have also been revised upward since the previous forecasts. ECB staff now project the euro area’s economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The outlook for 2026 and 2027 has been adjusted upward from June, primarily due to the economy’s unexpected resilience. In July, euro area unemployment held steady at 6.4%, while employment and labor force growth continued to slow, with productivity gradually improving.
Higher Borrowing Costs Impact Lending Conditions
Following the rate hikes, borrowing costs have already increased. Bank lending rates for companies averaged 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Meanwhile, mortgage rates remained at 3.5% during June and July. In July, annual growth in bank lending to companies rose to 4.4%, while mortgage lending growth slowed to 3.0%, according to data presented by the ECB.
The Governing Council indicated that future interest rate decisions will be based on incoming economic and financial information. It will also evaluate the inflation outlook, underlying price pressures, and the transmission of monetary policy. The council did not commit to a specific rate path. Its asset purchase and pandemic emergency purchase portfolios continue to decline as the Eurosystem ceases reinvestment of principal from maturing securities. The ECB reaffirmed that its monetary policy remains centered on returning inflation sustainably to the 2% target over the medium term.