BERLIN, GERMANY / RankWire.AI / – On Thursday, the European Central Bank increased its three main interest rates by 25 basis points as inflationary pressures within the euro area persisted. The ECB attributed ongoing inflation to the conflict in the Middle East, which continues to exert upward pressure on prices across the region. The deposit facility rate will be elevated to 2.50% from 2.25%, the main refinancing rate will move to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to take effect on September 16, 2026.
The ECB emphasized that inflation remains above its medium-term 2% target and might stay elevated for an extended duration. In August, euro area headline inflation rose to 3.3%, up from 2.9% in July. Energy inflation surged to 14.3% from 10.3% in July, while food inflation stayed steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%, with services inflation decreasing to 3.0% from 3.3%.
Alongside its interest rate decision, the central bank provided revised economic forecasts. ECB staff project headline inflation to average 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. The forecast for 2026 remained unchanged from June, while estimates for 2027 and 2028 were 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 Expectations Rise Due to Rising Energy Prices
ECB President Christine Lagarde indicated that higher energy costs have elevated the projected inflation trajectory. The ECB anticipates headline inflation will remain significantly above the target into the first half of 2027, before energy inflation is expected to decline and turn negative during parts of 2028. The bank noted that rising energy prices should gradually influence core and food inflation. According to its latest assessment, most longer-term inflation expectations stay around 2%.
Economic growth projections also saw an upward revision 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. The upward revisions for 2026 and 2027 are primarily due to stronger-than-anticipated economic resilience. In July, euro area unemployment remained steady at 6.4%, with employment and labor force growth continuing to slow while productivity gradually improved.
Rising Rates Affect Lending Conditions
The cost of borrowing has already increased following earlier monetary tightening measures. Bank lending rates for companies stood at 3.8% in June and July, up from 3.6% in May. The market-based corporate debt rate reached 4.0% in July. Mortgage rates remained steady at 3.5% in June and July. Growth in annual 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 stated that future decisions on interest rates will depend on incoming economic and financial data. It will also evaluate the inflation outlook, core price pressures, and how monetary policy transmits through the economy. The council did not commit to a specific trajectory for rates. Its asset purchase and pandemic emergency purchase programs continue to wind down as the Eurosystem ceases reinvestment of principal from maturing securities. The ECB reaffirmed that its monetary policy remains focused on achieving a sustainable return to its 2% inflation target over the medium term.