BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three key interest rates by 25 basis points on Thursday as inflation pressures continued. The ECB noted that the conflict in the Middle East continues to exert upward pressure on prices across the euro area. The deposit facility rate will go up to 2.50% 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 become effective on September 16, 2026.
ECB stated that inflation remains above its medium-term goal of 2% and could stay elevated for a prolonged period. In August, euro area headline inflation increased to 3.3% from 2.9% in July. Energy inflation jumped to 14.3%, compared to 10.3% in July. Food inflation remained steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%, while services inflation declined to 3.0% from 3.3%.
ECB also released updated economic forecasts along with its interest rate decision. Officials now project headline inflation will average 3.0% in 2026 and 2.5% in 2027. The forecast for 2028 shows inflation at 2.1%. The 2026 projection remains unchanged from June, but estimates 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 Forecast Adjusts Higher Due to Rising Energy Prices
ECB President Christine Lagarde indicated that increased energy prices have led to an upward revision of the inflation trajectory. The central bank projects that headline inflation will stay well above its target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative during part of 2028. The ECB mentioned that higher energy costs should gradually influence core and food inflation. According to the central bank’s latest assessment, most longer-term inflation expectations remain around 2%.
ECB also upgraded its economic growth outlook compared to previous forecasts. It now expects the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The projections for 2026 and 2027 have been increased from the June estimates, primarily due to stronger-than-anticipated economic resilience. As of July, euro area unemployment stood at 6.4%, while employment and labor force growth continued to slow, with productivity gradually improving.
Rising Interest Rates Affect Borrowing Dynamics
ECB indicated that borrowing costs have already risen following earlier monetary tightening measures. Bank lending rates for companies reached 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt climbed to 4.0% in July. Mortgage rates stayed steady at 3.5% during June and July. Meanwhile, annual growth in bank lending to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0%, according to figures presented by the ECB.
ECB emphasized that future rate decisions will depend on incoming economic and financial data. It will also evaluate inflation prospects, underlying price pressures, and how monetary policy is transmitted. The Governing Council refrained from committing to a specific rate path. Its asset purchase programs and pandemic emergency purchase portfolios continue to decline as the Eurosystem ceases reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains centered on sustainably returning inflation to the 2% target over the medium term.