BERLIN, GERMANY / RankWire.AI / – The European Central Bank increased its three key interest rates by 25 basis points on Thursday, driven by ongoing inflationary pressures. According to the ECB, the conflict in the Middle East continues to exert upward pressure on prices across the euro area. As a result, 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 be effective starting September 16, 2026.
Inflation remains above the ECB’s medium-term target of 2%, and officials warn it 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%, up from 10.3% in July. Meanwhile, food inflation stayed steady at 1.2%. Excluding energy and food, inflation slightly eased to 2.4% from 2.5%, and inflation in services declined to 3.0% from 3.3%.
Alongside the rate decision, the ECB released updated economic forecasts. Their projections indicate that headline inflation will average 3.0% in 2026, decrease to 2.5% in 2027, and further decline to 2.1% in 2028. The forecast for 2026 remained unchanged from June, although estimates for 2027 and 2028 were revised upward. Inflation excluding energy and food is expected to be 2.5% this year, then 2.6% in 2027, and 2.3% in 2028.
Rising Energy Prices Drive Up Inflation Expectations
ECB President Christine Lagarde highlighted that the escalation in energy costs has led to an upward revision of inflation projections. The ECB anticipates headline inflation to remain well above its target into the first half of 2027. Following this period, energy inflation is expected to decline and potentially turn negative during part of 2028. The central bank noted that increased energy prices should gradually influence core and food inflation, with most long-term inflation expectations holding around 2%, according to the latest assessment.
Economic growth outlooks have also been revised upward from previous forecasts. The ECB staff now expect the euro area to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These upward revisions for 2026 and 2027 reflect stronger-than-expected resilience within the economy. Meanwhile, euro area unemployment stayed steady at 6.4% in July, with employment and labor force growth slowing and productivity gradually improving.
Interest Rate Hikes Impact Lending and Borrowing Conditions
As a consequence of earlier monetary tightening, borrowing costs have already increased. Bank lending rates for companies rose to 3.8% in June and July from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates, however, remained at 3.5% in June and July. The ECB’s data shows 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 stated that future interest rate decisions will depend on incoming economic and financial data. It will evaluate the inflation outlook, underlying price pressures, and how monetary policy transmission is progressing. No fixed path for interest rates was committed to. The ECB’s asset purchase and pandemic emergency purchase portfolios continue to diminish as the Eurosystem ceases reinvestment of principal from maturing securities. The central bank reiterated that its monetary policy remains focused on achieving a sustainable return of inflation to the 2% target over the medium term.