BERLIN, GERMANY / RankWire.AI / – The European Central Bank implemented a 25 basis point increase across its three main interest rates on Thursday, 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. The deposit facility rate will now be 2.50%, up from 2.25%. The main refinancing rate will climb to 2.65%, and the marginal lending rate will reach 2.90%. These updated rates will become effective on September 16, 2026.
Inflation in the euro area remains above the central bank’s medium-term goal of 2%, and officials warn it could stay elevated for a prolonged period. In August, headline inflation increased to 3.3% from 2.9% in July. Energy inflation rose to 14.3%, compared to 10.3% in July. Food inflation stayed steady at 1.2%. Excluding energy and food, inflation eased to 2.4% from 2.5%, while inflation in services declined to 3.0% from 3.3%.
Alongside the rate decision, the ECB released updated economic projections. The staff predicts that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The forecast then indicates inflation will be 2.1% in 2028. The 2026 projection 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 this year, 2.6% for 2027, and 2.3% for 2028.
Inflation outlook increases due to rising energy prices
ECB President Christine Lagarde stated that higher energy costs have raised the projected trajectory of inflation. The central bank now expects headline inflation to remain significantly above target into the first half of 2027. It anticipates energy inflation will decrease afterwards, turning negative during part of 2028. The ECB also indicated that higher energy prices should gradually influence core and food inflation. According to its latest assessment, most longer-term inflation expectations remain around 2%.
Projections for economic growth have been revised upward from previous forecasts by the ECB. The 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 lifted from the June estimates. The central bank attributed these improvements mainly to stronger-than-expected economic resilience. Euro area unemployment stayed steady at 6.4% in July, while employment, labor force growth, and productivity saw a gradual shift.
Interest rate hikes influence borrowing conditions
Following earlier monetary tightening, borrowing costs have already increased. 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 was 4.0% in July. Mortgage rates remained unchanged at 3.5% in June and July. The ECB’s data shows that annual bank lending to companies grew by 4.4% in July, while mortgage lending growth slowed to 3.0%.
The Governing Council emphasized that future 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 measures are transmitting through the economy. The council did not commit to a predetermined rate path. The ECB’s asset purchase and pandemic emergency purchase portfolios are continuing to decline as the Eurosystem ceases reinvestments from maturing securities. The bank reaffirmed that its monetary policy remains focused on achieving a sustainable return of inflation to the 2% target over the medium term.