BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points on Thursday. This move came as inflation pressures continued to persist. The ECB explained that the ongoing Middle East conflict continues to exert upward pressure on prices across the euro area. The deposit facility rate now stands at 2.50%, up from 2.25%. The main refinancing rate has been raised to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will come into effect on September 16, 2026.
The ECB indicated that inflation remains above its medium-term goal of 2% and could stay high for some time. In August, euro area headline inflation increased to 3.3%, up from 2.9% in July. Energy inflation rose sharply to 14.3%, compared to 10.3% in July. Food inflation stayed steady at 1.2%. Inflation excluding energy and food fell slightly to 2.4% from 2.5%, while services inflation decreased to 3.0% from 3.3%.
Along with the rate decision, the ECB shared updated economic forecasts. Officials expect headline inflation to average 3.0% in 2026 and 2.5% in 2027. For 2028, inflation is projected at 2.1%. The forecast for 2026 remained unchanged from June, but projections for 2027 and 2028 increased. Excluding energy and food, inflation is forecasted at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Grows Due to Rising Energy Prices
ECB President Christine Lagarde stated that higher energy costs have raised the expected trajectory for inflation. The central bank anticipates headline inflation will remain significantly above target into the first half of 2027. It expects energy inflation to decline afterward and turn negative during part of 2028. The ECB added that rising energy prices should gradually influence core and food inflation as well. Most long-term inflation expectations stay around 2%, the ECB’s latest assessment shows.
Projections for economic growth have also improved from earlier forecasts. ECB staff now expect the euro area economy to grow 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 were raised from the June predictions. The ECB mainly attributed the upward revision to stronger-than-expected economic resilience. Euro area unemployment remained steady at 6.4% in July. Employment and labor force growth continue to slow, but productivity is gradually improving.
Higher Interest Rates Are Impacting Borrowing and Lending Conditions
Borrowing costs have already increased due to previous monetary tightening. Bank lending rates for companies were 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 stayed at 3.5% in June and July. Meanwhile, growth in bank lending to companies rose to 4.4% in July. In contrast, mortgage lending growth slowed to 3.0%, according to data from the ECB.
The Governing Council said future interest rate decisions will depend on upcoming economic and financial data. The committee will evaluate the inflation outlook, underlying price pressures, and how monetary policy measures are transmitting. It did not commit to a specific rate path. The ECB’s asset purchase programs and pandemic emergency purchases are decreasing as the Eurosystem stops reinvesting from maturing securities. The bank reaffirmed that its monetary policy remains focused on bringing inflation sustainably back to the 2% target over the medium term.