BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three key interest rates by 25 basis points on Thursday amid ongoing inflation pressures. The ECB pointed out that conflicts in the Middle East continue to put upward pressure on prices across the euro area. The deposit facility rate will now be 2.50%, up from 2.25%. The main refinancing rate will rise to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will take effect on September 16, 2026.
The ECB highlighted that inflation remains above its medium-term target of 2%, and could stay high for a prolonged period. Euro area headline inflation climbed to 3.3% in August from 2.9% in July. Energy inflation increased to 14.3%, compared to 10.3% in July. Food inflation held steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%, while services inflation decreased to 3.0% from 3.3%.
Along with the rate decision, the ECB released updated economic forecasts. Officials expect headline inflation to average 3.0% in 2026 and 2.5% in 2027. For 2028, inflation is forecasted at 2.1%. The 2026 projection stayed the same as in June, but estimates for 2027 and 2028 rose. Inflation excluding energy and food is expected to be 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Climbs as Energy Prices Surge
ECB President Christine Lagarde stated that rising energy costs have pushed up the expected path for inflation. The bank predicts that headline inflation will stay significantly above target into the first half of 2027. It expects energy inflation to decrease afterward and turn negative during parts of 2028. The ECB noted that higher energy prices should gradually influence core and food inflation. Most long-term inflation expectations remain near 2%, based on the latest assessment by the central bank.
Economic growth forecasts also saw improvement from previous estimates. The ECB staff now project the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The forecasts for 2026 and 2027 increased from the June projections. The central bank attributes the upward revisions mainly to stronger-than-expected economic resilience. Euro area unemployment stayed at 6.4% in July, while employment and labor force growth continued to slow, and productivity showed gradual improvement.
Higher Rates Influence Borrowing Conditions
Borrowing costs have already risen following earlier monetary tightening. Bank lending rates for companies averaged 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 remained steady at 3.5% in June and July. Growth in bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0%, according to ECB data.
The Governing Council indicated that future interest rate moves will depend on upcoming economic and financial information. It will also consider the inflation outlook, underlying price pressures, and how monetary policy transmits through the economy. The council did not commit to a specific rate path. Its asset purchase programs, including pandemic emergency purchases, continue to decline as the Eurosystem stops reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy focus remains on returning inflation sustainably to the 2% target over the medium term.