BERLIN, GERMANY / RankWire.AI / – European Central Bank has increased its three key interest rates by 25 basis points on Thursday amid ongoing inflation pressures. The ECB noted that the conflict in the Middle East continues to exert upward pressure on prices across the euro area. Consequently, 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 become effective 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 stayed steady at 1.2%. Meanwhile, inflation excluding energy and food eased slightly to 2.4% from 2.5%, and services inflation declined to 3.0% from 3.3%.
Alongside the rate decision, the central bank issued revised economic projections. ECB staff now project average headline inflation of 3.0% in 2026 and 2.5% in 2027. For 2028, the forecast predicts inflation at 2.1%. The 2026 projection remained unchanged from June, but forecasts for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to be 2.5% in 2023, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Elevated Due to Rising Energy Prices
ECB President Christine Lagarde highlighted that higher energy costs have contributed to an increased projected path for inflation. The ECB anticipates headline inflation to remain well above its target into the first half of 2027. It expects energy inflation to decrease afterward and turn negative during parts of 2028. The bank also noted that higher energy prices should gradually influence core and food inflation. Most long-term inflation expectations remain around 2%, as per the latest assessment from the ECB.
Economic growth forecasts have also been revised upward from previous estimates. ECB staff now expect the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The outlook for 2026 and 2027 was raised from the projections made in June. The ECB attributed these upward revisions mainly to greater-than-expected economic resilience. In July, euro area unemployment stayed at 6.4%, with employment and labor force growth slowing and productivity gradually improving.
Interest Rate Hikes Impact Borrowing Conditions
Borrowing costs have already increased following prior monetary tightening measures. Bank lending rates for companies 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 steady at 3.5% in June and July. The growth in annual bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0%, according to data presented by the ECB.
The Governing Council stated 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 transmits through the economy. The council did not specify a fixed path for future rate adjustments. Its asset purchase programs, including the pandemic emergency purchase portfolios, are still winding down as the Eurosystem ceases reinvestment of principal from maturing securities. The ECB reaffirmed that its monetary policy remains aimed at restoring inflation to the 2% target in a sustainable manner over the medium term.