BERLIN, GERMANY / RankWire.AI / – On Thursday, the European Central Bank increased its three main interest rates by 25 basis points as inflation pressures persisted. The ECB highlighted ongoing pressure from the Middle East conflict on prices across the euro area. As a result, the deposit facility rate will rise to 2.50% from 2.25%, the main refinancing rate to 2.65%, and the marginal lending rate to 2.90%. These new rates are scheduled to take effect on September 16, 2026.
Inflation remains above the ECB’s medium-term target of 2% and could stay elevated for an extended period, according to the central 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% in July. Food inflation stayed steady at 1.2%, while inflation excluding energy and food eased slightly to 2.4% from 2.5%, and services inflation fell to 3.0% from 3.3%.
Alongside the rate decision, the ECB released updated economic forecasts. Staff project average headline inflation at 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. The 2026 forecast remained unchanged from June, but projections for 2027 and 2028 have been raised. Inflation excluding energy and food is forecasted at 2.5% this year, with figures of 2.6% in 2027 and 2.3% in 2028.
Inflation outlook rises amid rising energy costs
ECB President Christine Lagarde noted that higher energy prices have pushed up inflation projections. The central bank expects headline inflation to stay well above the target into the first half of 2027, with energy inflation expected to decline afterward and turn negative for part of 2028. The ECB indicated that higher energy prices should gradually influence core and food inflation, with most long-term inflation expectations remaining around 2%, according to its latest assessment.
Economic growth forecasts have also been revised upward from earlier projections. The ECB now expects the euro area economy to grow 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 have been increased from June, mainly due to stronger-than-anticipated economic resilience. Unemployment in the euro area was steady at 6.4% in July, as employment and labor force growth continued to slow and productivity saw gradual improvements.
Rising rates influence borrowing costs
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 hit 4.0% in July. Mortgage rates remained steady at 3.5% during June and July. Additionally, annual bank lending growth to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0%, according to ECB data.
The Governing Council stated that future interest rate decisions will depend on incoming economic and financial data. It will also evaluate the inflation outlook, core price pressures, and the transmission of monetary policy. The council did not commit to a fixed interest rate path. Its asset purchase programs, including pandemic emergency purchases, will continue to decline as the Eurosystem ceases reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains focused on returning inflation sustainably to the 2% target over the medium term.