BERLIN, GERMANY / RankWire.AI / – On Thursday, the European Central Bank increased its three key interest rates by 25 basis points, citing ongoing inflation pressures. The ECB highlighted that the conflict in the Middle East continues to exert upward pressure on prices throughout the euro area. As a result, the deposit facility rate will be raised to 2.50% from 2.25%. The main refinancing rate will move up to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to take effect on September 16, 2026.
According to the ECB, inflation remains above its medium-term target of 2% and could stay elevated for a prolonged period. In August, euro area headline inflation increased to 3.3% from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation remained steady at 1.2%. Meanwhile, inflation excluding energy and food eased slightly to 2.4% from 2.5%, with services inflation decreasing to 3.0% from 3.3%.
Alongside the interest rate announcement, the ECB published updated economic forecasts. Staff projections now anticipate average headline inflation of 3.0% in 2026 and 2.5% in 2027, with a further forecast of 2.1% for 2028. The 2026 outlook remained unchanged from June, while estimates for 2027 and 2028 were revised upward. Inflation excluding energy and food is forecasted at 2.5% for this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Heightens as Energy Prices Rise
ECB President Christine Lagarde stated that increased energy prices have raised the projected path for inflation. The central bank expects headline inflation to stay well above its target through the first half of 2027. Following this period, energy inflation is anticipated to decline and turn negative during part of 2028. The ECB noted that higher energy costs should gradually impact core and food inflation levels. According to the latest assessment by the central bank, most longer-term inflation expectations remain around 2%.
Economic growth projections have also improved compared to previous forecasts. The ECB’s staff now expects 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 were revised upward from the June projections, primarily reflecting stronger-than-expected economic resilience. As of July, euro area unemployment held steady at 6.4%, with employment and labor force growth slowing and productivity gradually increasing.
Rate Hikes Influence Lending Conditions
Interest rates for borrowing have already begun to climb following earlier monetary tightening measures. Bank lending rates for companies reached 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt hit 4.0% in July. Mortgage rates, meanwhile, remained steady at 3.5% during June and July. The ECB’s data indicates that annual growth in bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0%.
The Governing Council emphasized that future interest rate decisions will be contingent on incoming economic and financial data. It will also evaluate the inflation outlook, underlying price pressures, and how monetary policy transmits through the economy. The council did not specify a predetermined rate path. Its asset purchase and pandemic emergency purchase portfolios continue to shrink as the Eurosystem ceases reinvestment of principal from maturing securities. The ECB reaffirmed that its monetary policy remains focused on restoring inflation to the 2% target in a sustainable manner over the medium term.