BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its trio of key interest rates by 25 basis points on Thursday, citing ongoing inflation pressures. The ECB noted that tensions in the Middle East continue to exert upward pressure on prices across the euro area. The deposit facility rate will now rise 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 are set to take effect on September 16, 2026.
The ECB stated that inflation remains above its medium-term goal of 2% and 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%, compared with 10.3% in July. Food inflation remained steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%, while services inflation decreased to 3.0% from 3.3%.
The central bank also released updated economic projections alongside its interest rate decision. According to ECB staff, headline inflation is expected to average 3.0% in 2026 and 2.5% in 2027. The forecast indicates inflation will be 2.1% in 2028. The projection for 2026 remained unchanged from June, but forecasts for 2027 and 2028 have been revised upward. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Rises Due to Increasing Energy Costs
ECB President Christine Lagarde highlighted that rising energy prices have pushed the projected inflation path higher. The central bank anticipates headline inflation will stay well above its target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative through part of 2028. The ECB explained that higher energy prices should gradually influence core and food inflation. Most measures of long-term inflation expectations remain close to 2%, based on the latest assessment from the central bank.
Economic growth forecasts have also improved from earlier estimates. The ECB now projects the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 were revised upward from June. The central bank attributed the upward revisions primarily to stronger-than-expected economic resilience. In July, euro area unemployment remained steady at 6.4%, while employment and labor force growth continued to slow, with productivity gradually improving.
Rising Interest Rates Impact Borrowing Conditions
Borrowing costs have already risen as a result of previous monetary tightening. In June and July, bank lending rates for companies stood at 3.8%, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates stayed at 3.5% during June and July. Meanwhile, annual bank lending growth to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0%, according to data presented by the ECB.
The Governing Council stated that future rate decisions will depend on incoming economic and financial data. It will also review the inflation outlook, underlying price pressures, and how monetary policy transmits through the economy. The council did not commit to a specific interest rate path. Its asset purchase and pandemic emergency purchase portfolios will continue to decline as the Eurosystem ceases reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains aimed at returning inflation sustainably to the 2% target over the medium term.