BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points on Thursday amid ongoing inflation pressures. The ECB highlighted that tensions in the Middle East persistently contribute to rising prices across the euro area. The deposit facility rate will now be 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 come into effect on September 16, 2026.
The ECB noted that inflation remains above its medium-term goal of 2% and could stay elevated for an extended period. Euro area headline inflation climbed to 3.3% in August, compared to 2.9% in July. Energy inflation surged to 14.3%, up from 10.3% in July, while food inflation stayed steady at 1.2%. 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 published updated economic forecasts. The central bank’s staff now project average headline inflation of 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. The forecast for 2026 remains unchanged from June, but estimates for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to be 2.5% this year, rising to 2.6% in 2027, then falling to 2.3% in 2028.
Inflation Outlook Rises Amid Rising Energy Prices
ECB President Christine Lagarde stated that higher energy prices have pushed the inflation trajectory upward. The central bank anticipates headline inflation will remain significantly above the target into the first half of 2027. It expects energy inflation to decline subsequently and turn negative during parts of 2028. The ECB added that increased energy costs are expected to gradually influence core and food inflation. Most long-term inflation expectation measures stay around 2%, based on the bank’s latest assessment.
The ECB’s economic growth outlook has also improved from previous forecasts. Staff now project the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The projections for 2026 and 2027 have been revised upward from June’s estimates, mainly reflecting stronger-than-expected economic resilience. Euro area unemployment remained steady at 6.4% in July, while employment growth and labor force expansion continued to slow, with productivity gradually improving.
Rising Interest Rates Impact Borrowing Conditions
Borrowing costs have already increased due to previous monetary tightening measures. Bank lending rates for firms reached 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt rose to 4.0% in July. Mortgage rates stayed at 3.5% in 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 figures presented by the ECB.
The Governing Council indicated that future interest rate decisions will be based on incoming economic and financial data. It will also evaluate the inflation outlook, underlying price pressures, and the transmission of monetary policy. No fixed path for interest rates has been committed to. The ECB’s asset purchase and pandemic emergency purchase programs are gradually declining as the Eurosystem stops reinvesting principal from maturing securities. The bank emphasized that its monetary policy remains focused on restoring inflation to the 2% target sustainably over the medium term.