BERLIN, GERMANY / RankWire.AI / – The European Central Bank announced an increase of 25 basis points to its three main interest rates 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 area. As a result, the deposit facility rate will rise from 2.25% to 2.50%. 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.
According to the ECB, inflation remains above its medium-term goal of 2% and is expected to stay elevated for an extended duration. 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. Food inflation stayed 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 interest rate decision, the ECB also released updated economic forecasts. Officials project headline inflation to average 3.0% in 2026 and 2.5% in 2027, with a further decline to 2.1% in 2028. The forecast for 2026 remained consistent with June’s projections, whereas the 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.
Inflation Outlook Elevated Due to Rising Energy Costs
ECB President Christine Lagarde stated that the increase in energy prices has raised the projected trajectory for inflation. The central bank anticipates headline inflation remaining significantly above its target into the first half of 2027. It expects energy inflation to decline subsequently and turn negative during parts of 2028. The ECB indicated that higher energy costs will gradually influence core and food inflation. Most long-term inflation expectation measures continue to hover around 2%, as per the latest assessment by the central bank.
The ECB’s economic growth outlook has also been revised upward from previous forecasts. The staff now expect 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 have been increased from those made in June, primarily reflecting stronger-than-expected economic resilience. As of July, euro area unemployment remained steady at 6.4%, with employment and labor force growth continuing to slow and productivity gradually improving.
Rising Rates Impact Lending and Borrowing Conditions
The cost of borrowing has already been affected by earlier monetary tightening measures. 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 held at 3.5% in June and July. Growth in bank lending to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0%, based on figures shared by the ECB.
The Governing Council noted that future interest rate decisions will depend on incoming economic and financial data. They will also evaluate the inflation outlook, underlying price pressures, and how monetary policy transmissions are progressing. No fixed path for interest rates has been committed to. Additionally, the ECB’s asset purchase programs and pandemic emergency purchase portfolios are continuing to decline as the Eurosystem ceases reinvestment of maturing securities. The central bank reaffirmed its focus on restoring inflation to the 2% target sustainably over the medium term.