BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three key interest rates by 25 basis points on Thursday as inflation pressures persisted. The ECB stated that ongoing Middle East conflict continues to exert upward pressure on prices across the euro zone. The deposit facility rate will now rise 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 take effect on September 16, 2026.
Inflation remains above the ECB’s medium-term 2% target and could stay elevated for an extended period, according to the bank. In August, euro area headline inflation increased to 3.3% from 2.9% in July, with energy inflation jumping to 14.3% from 10.3%. Food inflation stayed steady at 1.2%, while inflation excluding energy and food eased to 2.4% from 2.5%, and services inflation declined to 3.0% from 3.3%.
Alongside the rate decision, the ECB published updated economic projections. Staff now forecast headline inflation to average 3.0% in 2026, 2.5% in 2027, and then 2.1% in 2028. The 2026 projection remained unchanged from June, but forecasts for 2027 and 2028 increased. For inflation excluding energy and food, estimates are 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation outlook worsens amid rising energy costs
ECB President Christine Lagarde explained that increased energy prices have raised the projected inflation path. The central bank expects headline inflation to stay well above its target through the first half of 2027, with energy inflation expected to decline afterward and turn negative during part of 2028. The ECB also noted that higher energy prices should gradually influence core and food inflation, and most longer-term measures of inflation expectations remain around 2%, according to the latest assessment.
Economic growth forecasts have also been revised upwards from earlier estimates. Staff now anticipate the euro area economy will 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 the June projections, primarily due to stronger-than-expected economic resilience. Unemployment in the euro area stayed at 6.4% in July, while employment and labor force growth continued to slow, with productivity gradually improving.
Higher interest rates impact borrowing dynamics
Following earlier monetary tightening, borrowing costs have already risen. Bank lending rates for companies reached 3.8% in June and July, up from 3.6% in May, and the cost of market-based corporate debt climbed to 4.0% in July. Mortgage rates held steady at 3.5% in June and July. Meanwhile, annual bank lending to companies increased to 4.4% in July, but mortgage lending growth slowed to 3.0%, as detailed by the ECB.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial data, along with assessments of inflation prospects, underlying price pressures, and how monetary policy transmissions are progressing. No fixed path for rates has been committed to, and the ECB’s asset purchase and pandemic emergency purchase portfolios are still declining as the Eurosystem ceases reinvesting principal from maturing securities. The bank reaffirmed that its monetary strategy remains focused on returning inflation sustainably to the 2% target over the medium term.