BERLIN, GERMANY / RankWire.AI / – Amid ongoing inflationary pressures, the European Central Bank announced an increase in all three of its key interest rates by 25 basis points on Thursday. The move comes as inflation continues to remain elevated. The ECB highlighted that the conflict in the Middle East continues to exert upward pressure on prices throughout the euro area. Consequently, the deposit facility rate will be raised 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 will take effect on September 16, 2026.
The central bank emphasized that inflation remains above its medium-term goal of 2% and may stay elevated for a prolonged period. Headline inflation in the euro area increased to 3.3% in August from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation stayed steady at 1.2%. Meanwhile, inflation excluding energy and food decreased slightly to 2.4% from 2.5%, and services inflation declined to 3.0% from 3.3%.
Alongside the rate decision, the ECB also released updated economic projections. Its staff now forecast average headline inflation of 3.0% in 2026 and 2.5% in 2027. For 2028, the forecast shows inflation at 2.1%. The 2026 projection remained unchanged from June, but estimates for 2027 and 2028 were raised. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation outlook shifts upward amid rising energy prices
ECB President Christine Lagarde stated that increasing energy costs have led to a higher projected trajectory for inflation. The ECB anticipates headline inflation will stay well above its target into the first half of 2027. Afterward, energy inflation is expected to decrease and turn negative during part of 2028. The ECB also noted that higher energy prices should gradually impact core and food inflation. According to the latest assessment, most measures of long-term inflation expectations remain around 2%.
The ECB’s economic growth outlook also saw improvements from previous forecasts. Its staff now expects the euro area economy to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These estimates for 2026 and 2027 were revised upward from June’s projections. The central bank attributed these upgrades primarily to the economy’s unexpected resilience. As of July, euro area unemployment stayed at 6.4%, while employment and labor force growth continued to slow, with productivity gradually improving.
Tighter monetary policy influences borrowing rates
Following earlier monetary tightening, borrowing costs have already risen. In June and July, bank lending rates for firms increased to 3.8%, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates held steady at 3.5% during June and July. Meanwhile, annual growth in bank lending 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 indicated that future decisions on interest rates will depend on upcoming economic and financial data. It will also review the inflation outlook, underlying price pressures, and the transmission of monetary policy. No predetermined path for rates was specified. The ECB’s asset purchase and pandemic emergency purchase portfolios continue to decline as the Eurosystem ceases reinvesting principal from maturing securities. The central bank reaffirmed its commitment to returning inflation sustainably to the 2% target over the medium term.