BERLIN, GERMANY / RankWire.AI / – The European Central Bank announced an upward adjustment of its three principal interest rates by 25 basis points on Thursday, citing ongoing inflation pressures. The ECB attributed the rise partly to the continuing conflict in the Middle East, which is adding upward pressure on prices throughout the euro area. Consequently, the deposit facility rate will be increased to 2.50% from 2.25%, the main refinancing rate will be elevated to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to take effect on September 16, 2026.
Inflation in the euro area remains above the central bank’s medium-term target of 2% and is expected to stay high for a prolonged period. In August, headline inflation rose to 3.3% from 2.9% in July. Energy inflation surged to 14.3%, up from 10.3% in July, while food inflation remained steady at 1.2%. Excluding energy and food, inflation eased slightly to 2.4% from 2.5%, and inflation in services dropped to 3.0% from 3.3%.
Alongside the rate decision, the ECB published updated economic projections. Their staff now forecast average headline inflation of 3.0% in 2026 and 2.5% in 2027, with a subsequent decrease to 2.1% in 2028. The projections for 2026 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% this year, then 2.6% in 2027, and 2.3% in 2028.
Rising Energy Prices Influence Inflation Outlook
ECB President Christine Lagarde commented that increased energy costs have raised the inflation forecast path. The central bank anticipates headline inflation will remain well above target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative during parts of 2028. The ECB also noted that higher energy prices should gradually impact core and food inflation levels. According to their latest assessment, most longer-term inflation expectations stay around 2%.
Economic growth forecasts have been revised upward from previous estimates. ECB staff now project the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The upward revisions for 2026 and 2027 reflect stronger-than-expected economic resilience. Meanwhile, euro area unemployment held steady at 6.4% in July, with employment and labor force growth slowing, though productivity has gradually improved.
Interest Rate Hikes Impact Borrowing Conditions
Following earlier monetary tightening, borrowing expenses have already risen. Bank lending rates for companies were at 3.8% in June and July, compared to 3.6% in May. The cost of market-based corporate debt increased to 4.0% in July. Mortgage rates remained steady at 3.5% in June and July. In July, annual growth in bank lending to companies rose to 4.4%, while mortgage lending growth slowed to 3.0%, based on data from the ECB.
The Governing Council stated that future interest rate decisions will depend on incoming economic and financial data. They will also evaluate inflation prospects, underlying price pressures, and how monetary policy transmission is unfolding. The council did not commit to a specific rate path. Their asset purchase and pandemic emergency purchase portfolios are gradually declining as the Eurosystem ceases reinvesting principal from maturing securities. The ECB emphasized that its monetary policy remains aimed at sustainably returning inflation to the 2% target over the medium term.