BERLIN, GERMANY / RankWire.AI / – European Central Bank announced on Thursday its decision to raise all three of its main interest rates by 25 basis points, citing ongoing inflation pressures. The bank highlighted that the conflict in the Middle East continues to exert upward pressure on prices across the euro area. The deposit facility rate will now be at 2.50%, up from 2.25%. The main refinancing rate increases to 2.65%, and the marginal lending rate reaches 2.90%. These new rates will take effect starting September 16, 2026.
In its statement, the ECB indicated that inflation remains above its 2% medium-term target and could stay elevated for an extended period. In August, euro area headline inflation rose to 3.3%, from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation held steady at 1.2%. Meanwhile, inflation excluding energy and food eased slightly to 2.4% from 2.5%, and services inflation decreased to 3.0% from 3.3%.
Alongside the rate decision, the ECB released updated economic projections. According to staff estimates, headline inflation is expected to average 3.0% in 2026 and 2.5% in 2027, with a forecast of 2.1% in 2028. The 2026 projection remained unchanged from June, while forecasts for 2027 and 2028 saw upward revisions. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Elevated Due to Rising Energy Costs
ECB President Christine Lagarde noted that increased energy prices have pushed the inflation forecast higher. The central bank anticipates headline inflation will remain significantly above the target into the first half of 2027. It expects energy inflation to decline thereafter and turn negative for parts of 2028. The ECB also mentioned that higher energy prices are expected to gradually influence core and food inflation. According to the latest assessment, most measures of long-term inflation expectations stay around 2%.
Economic growth projections have also been revised upward from previous estimates. ECB staff now foresee a 0.9% expansion for the euro area economy in 2026, followed by 1.4% in 2027 and 1.5% in 2028. These forecasts for 2026 and 2027 have been raised from the June projections, primarily reflecting greater-than-expected economic resilience. As of July, euro area unemployment stayed steady at 6.4%, while employment, labor force growth, and productivity continued to evolve, with productivity gradually improving.
Rising Rates Impact Lending and Borrowing Dynamics
Following earlier monetary tightening, borrowing costs have already increased. For example, 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% during July. Mortgage rates remained steady at 3.5% in June and July. As of July, annual growth in bank lending to companies rose to 4.4%, while mortgage lending growth slowed to 3.0%, according to data presented by the ECB.
The Governing Council emphasized that future interest rate decisions will be data-dependent, considering incoming economic and financial information. It will also evaluate the inflation outlook, underlying price pressures, and how monetary policy transmission is progressing. The council did not commit to a specific interest rate trajectory. Meanwhile, the ECB’s asset purchase programs, including the pandemic emergency purchase portfolio, continue to decline as the Eurosystem stops reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains focused on achieving a sustainable return of inflation to the 2% target over the medium term.