BERLIN, GERMANY / RankWire.AI / – The European Central Bank increased its three key interest rates by 25 basis points on Thursday as inflation pressures continued. The ECB pointed out that ongoing conflicts in the Middle East continue to exert upward pressure on prices across the euro area. The deposit facility rate will go up to 2.50% from 2.25%, while the main refinancing rate will rise to 2.65%. The marginal lending rate will increase to 2.90%. These new rates will become effective on September 16, 2026.
The ECB stated that inflation still exceeds its medium-term target of 2% and might stay elevated for a prolonged period. Euro area headline inflation reached 3.3% in August, up from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation remained steady at 1.2%. Inflation excluding energy and food slightly decreased to 2.4% from 2.5%, while services inflation declined to 3.0% from 3.3%.
Alongside the rate decision, the central bank also released updated economic forecasts. ECB staff now project that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The forecast for 2028 shows inflation slowing to 2.1%. The projection for 2026 remained unchanged from June, but forecasts for 2027 and 2028 have been raised. Inflation excluding energy and food is expected to be 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Rises as Energy Prices Continue Climbing
ECB President Christine Lagarde said higher energy costs have pushed the projected path for inflation upward. The central bank anticipates that headline inflation will stay well above its target through the first half of 2027. After that, energy inflation is expected to decline and turn negative for parts of 2028. The ECB indicated that rising energy prices should gradually influence core and food inflation as well. According to the central bank’s latest assessment, most longer-term measures of inflation expectations remain around 2%.
Projections for economic growth have also been revised upward 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 growth forecasts for 2026 and 2027 were increased from June projections, mainly reflecting stronger-than-anticipated resilience. Euro area unemployment stayed at 6.4% in July, while employment and labor force growth continued to slow, with productivity gradually improving.
Rising Rates Influence Lending Conditions
The cost of borrowing has already increased following earlier monetary tightening measures. Bank lending rates for companies reached 3.8% in June and July, up from 3.6% in May. The market-based corporate debt rate hit 4.0% in July. Mortgage rates remained steady at 3.5% during June and July. Meanwhile, annual bank lending to companies grew by 4.4% in July, whereas mortgage lending growth slowed to 3.0%, according to data presented by the ECB.
The Governing Council emphasized that future interest rate decisions will depend on incoming economic and financial data. It will evaluate the inflation outlook, underlying price pressures, and how monetary policy transmissions are evolving. The council did not commit to a specific trajectory for interest rates. Its asset purchase programs 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 bringing inflation back to the 2% target in a sustainable way over the medium term.