BERLIN, GERMANY / RankWire.AI / – The European Central Bank announced an uplift of its three main interest rates by 25 basis points on Thursday, driven by ongoing inflation pressures. The ECB highlighted that the conflict in the Middle East continues to exert upward pressure on prices across the euro zone. As a result, the deposit facility rate will increase to 2.50% from 2.25%. Additionally, the main refinancing rate will go up to 2.65%, while the marginal lending rate will reach 2.90%. These new rates will become effective on September 16, 2026.
The ECB indicated that inflation remains above its medium-term goal of 2% and could stay elevated for a prolonged period. Euro area headline inflation rose to 3.3% in August, up from 2.9% in July. Energy inflation escalated to 14.3%, compared to 10.3% in July, while food inflation remained steady at 1.2%. Inflation excluding energy and food slightly decreased to 2.4% from 2.5%, whereas services inflation declined to 3.0% from 3.3%.
Alongside the interest rate decision, the central bank released updated economic forecasts. ECB staff project that headline inflation will average 3.0% in 2026 and 2.5% in 2027, with a subsequent forecast of 2.1% in 2028. The projection for 2026 remained unchanged from June, but forecasts 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 outlook climbs due to rising energy prices
ECB President Christine Lagarde stated that higher energy prices have led to an increased inflation forecast path. The central bank predicts that headline inflation will stay well above its target into the first half of 2027. Afterward, energy inflation is expected to decrease and turn negative for parts of 2028. The ECB also indicated that rising energy prices should gradually influence core and food inflation, with most longer-term inflation expectations remaining around 2%, based on its latest assessment.
Economic growth projections have also been upgraded from previous forecasts. Staff now anticipate the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The forecasts for 2026 and 2027 were raised from those made in June, primarily due to the stronger-than-expected resilience of the economy. Meanwhile, euro area unemployment stayed steady at 6.4% in July, with employment and labor force growth continuing to slow and productivity gradually improving.
Interest rate hikes influence borrowing and lending dynamics
Following previous monetary tightening, borrowing costs have already risen. 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 increased to 4.0% in July. Meanwhile, mortgage rates remained steady at 3.5% during June and July. The ECB reported that annual growth in bank lending to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0%, based on data presented by the ECB.
The Governing Council emphasized that future decisions regarding interest rates will depend on incoming economic and financial data. They will evaluate the inflation outlook, underlying price pressures, and how monetary policy transmission is progressing. The council did not commit to any predetermined interest rate trajectory. Its asset purchase programs and pandemic emergency purchase portfolios are still decreasing as the Eurosystem ceases reinvestment of principal from maturing securities. The ECB reaffirmed that its monetary policy remains aimed at sustainably returning inflation to the 2% target over the medium term.