BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points 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 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 come into effect on September 16, 2026.
The ECB emphasized that inflation remains above its medium-term target of 2% and could stay elevated for an extended period. In August, euro area headline inflation increased to 3.3% from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July, while food inflation held steady at 1.2%. Inflation excluding energy and food declined slightly to 2.4% from 2.5%, and services inflation decreased to 3.0% from 3.3%.
Alongside the interest rate decision, the central bank provided updated economic forecasts. The ECB staff project average headline inflation of 3.0% in 2026 and 2.5% in 2027, with a further decrease to 2.1% in 2028. The 2026 forecast remained unchanged from June, but 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 prices push inflation outlook higher
ECB President Christine Lagarde explained that increased energy costs have raised the projected path for inflation. The central bank anticipates headline inflation will remain well above its 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 are likely to gradually influence core and food inflation. According to the latest assessment, most long-term inflation expectation measures remain around 2%.
Economic growth projections have also been revised upward compared to previous forecasts. The ECB 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 increased from June’s estimates. The central bank attributed these upward revisions primarily to stronger-than-anticipated economic resilience. As of July, euro area unemployment held steady at 6.4%, while employment and labor force growth continued to slow, with productivity gradually improving.
Interest rate hikes influence borrowing conditions
Following earlier monetary tightening, borrowing costs have already risen. Bank lending rates for 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 unchanged at 3.5% in June and July. The ECB reported that annual bank lending growth to companies increased to 4.4% in July, while growth in mortgage lending slowed to 3.0%, based on data presented by the central bank.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial information. It will also evaluate inflation prospects, underlying price pressures, and the effects of monetary policy transmission. The council did not commit to a specific interest rate path. Its asset purchase programs and pandemic emergency purchase portfolios continue to decline as the Eurosystem stops reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains aimed at restoring inflation sustainably to the 2% target over the medium term.