BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points on Thursday as inflation pressures persisted. The ECB highlighted that the ongoing Middle East conflict continues to exert upward pressure on prices across the euro area. The deposit facility rate will now be 2.50%, up from 2.25%. The main refinancing rate will move to 2.65%, with the marginal lending rate reaching 2.90%. These new rates will come into effect on September 16, 2026.
Inflation remains above the ECB’s medium-term target of 2%, and officials indicated it could stay elevated for a prolonged period. In August, euro area headline inflation rose to 3.3% from 2.9% in July. Energy inflation increased significantly 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 ECB released updated economic forecasts. Projections suggest that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The outlook for 2028 sees inflation at 2.1%. While the forecast for 2026 remained unchanged from June, estimates for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to be 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Rising Energy Costs Drive Up Inflation Expectations
ECB President Christine Lagarde stated that higher energy prices have raised the projected inflation path. The central bank anticipates that headline inflation will stay well above target into the first half of 2027, before energy inflation is expected to decline and turn negative during parts of 2028. The ECB noted that the increase in energy prices will gradually influence core and food inflation as well. Most measures of long-term inflation expectations remain around 2%, based on the central bank’s latest assessment.
Economic growth forecasts have also been revised upward from previous projections. The ECB staff now expect the euro area economy to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These upward revisions for 2026 and 2027 are mainly attributed to stronger-than-expected economic resilience. Unemployment in the euro area held steady at 6.4% in July, while employment and labor force growth continue to slow, with productivity gradually improving.
Interest Rate Increases Affect Lending Conditions
Following earlier monetary tightening, borrowing costs have already risen. For instance, bank lending rates to 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. Additionally, annual growth in bank lending to companies increased to 4.4% in July, while growth in mortgage lending slowed to 3.0%, according to data shared by the ECB.
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 the transmission of monetary policy. No predetermined path for interest rates was committed to. The ECB’s asset purchase and pandemic emergency purchase portfolios are still decreasing as the Eurosystem halts reinvestment of principal from maturing securities. The central bank reaffirmed that its monetary policy remains focused on achieving a sustainable return of inflation to the 2% target over the medium term.