BERLIN, GERMANY / RankWire.AI / – The 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 across the euro zone. As a result, the deposit facility rate will now stand at 2.50%, up from 2.25%. The main refinancing rate will be adjusted to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will take effect starting September 16, 2026.
The bank noted that inflation remains above its medium-term goal of 2% and may stay elevated for a prolonged period. Euro area headline inflation rose to 3.3% in August from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation held steady at 1.2%. Excluding energy and food, inflation eased to 2.4% from 2.5%, while services inflation declined to 3.0% from 3.3%.
Alongside its interest rate decision, the ECB released updated economic forecasts. Staff now project headline inflation to average 3.0% in 2026 and 2.5% in 2027, with a decline to 2.1% in 2028. The 2026 forecast remains unchanged since June, but projections for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to be 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Inflation outlook rises due to energy price increases
ECB President Christine Lagarde stated that rising energy costs have pushed the inflation forecast higher. The central bank anticipates that headline inflation will stay well above the target into the first half of 2027. It expects energy inflation to decrease afterward and turn negative during parts of 2028. The ECB added that higher energy prices should gradually influence core and food inflation. According to the latest assessment, most longer-term inflation expectations remain around 2%.
Economic growth projections also saw upward revisions from previous forecasts. ECB staff now expect the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The projections for 2026 and 2027 have been increased from the June outlook, mainly due to stronger-than-expected economic resilience. Euro area unemployment was steady at 6.4% in July, with employment and labor force growth slowing and productivity gradually improving.
Higher interest rates impact borrowing and lending conditions
Following earlier monetary tightening, borrowing costs have already increased. Bank lending rates for companies reached 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt was at 4.0% in July. Mortgage rates stayed at 3.5% in June and July. In July, annual bank lending to companies grew by 4.4%, while mortgage lending growth slowed to 3.0%, according to figures shared by the ECB.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial data. It will also evaluate the inflation outlook, underlying price pressures, and the effects of monetary policy transmission. The council did not commit to a specific path for rates. Its asset purchase 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 focused on sustainably returning inflation to the 2% target over the medium term.”