BERLIN, GERMANY / RankWire.AI / – The European Central Bank announced an increase of 25 basis points across its three main interest rates on Thursday, driven by ongoing inflationary pressures. The bank 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 elevated to 2.50% from 2.25%. The main refinancing rate will now be 2.65%, and the marginal lending rate will be 2.90%. These new rates will become effective on September 16, 2026.
The ECB emphasized that inflation remains above its medium-term target of 2% and could stay elevated for an extended duration. August saw euro area headline inflation rise to 3.3%, up from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July, while food inflation remained steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%, whereas services inflation fell to 3.0% from 3.3%.
Alongside the rate decision, the central bank released updated economic projections. According to ECB staff, headline inflation is expected to average 3.0% in 2026 and 2.5% in 2027, with a forecast of 2.1% for 2028. The 2026 outlook remained unchanged from June, but projections for 2027 and 2028 were raised. Inflation excluding energy and food is forecasted at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation forecast rises due to climbing energy costs
ECB President Christine Lagarde noted that increasing energy prices have pushed the inflation outlook higher. The central bank expects headline inflation to stay significantly above target through the first half of 2027. Afterward, energy inflation is anticipated to decline and turn negative during part of 2028. The ECB also mentioned that higher energy costs should gradually influence core and food inflation. Most longer-term measures of inflation expectations continue to hover around 2%, according to the latest assessment from the central bank.
Projections for economic growth have also been revised upward from previous forecasts. The ECB now expects 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 were increased from the June estimates. The central bank attributed these upward revisions primarily to a stronger-than-expected resilience in economic activity. In July, euro area unemployment remained steady at 6.4%, even as employment and labor force growth slowed and productivity showed signs of gradual improvement.
Rising interest rates influence borrowing conditions
Following prior monetary tightening, borrowing expenses have already risen. Bank lending rates for companies were recorded 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% during June and July. Meanwhile, annual bank lending to companies grew by 4.4% in July, while mortgage lending growth slowed to 3.0%, based on figures presented by the ECB.
The Governing Council stated that future interest rate decisions will be contingent on incoming economic and financial data. The assessment will also consider the inflation outlook, underlying price pressures, and how monetary policy measures are transmitted. No predefined path for rate adjustments was announced. The ECB’s asset purchase and pandemic emergency purchase portfolios continue to decline as the Eurosystem ceases reinvestment from maturing securities. The central bank reaffirmed that its monetary policy remains focused on restoring inflation to the 2% target in a sustainable manner over the medium term.