BERLIN, GERMANY / RankWire.AI / – The European Central Bank has elevated its three primary interest rates by 25 basis points on Thursday as inflation pressures continue to persist. The ECB noted that the ongoing conflict in the Middle East continues to exert upward pressure on prices across the euro area. As a result, the deposit facility rate will increase to 2.50% from 2.25%. Meanwhile, the main refinancing rate will go up to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to come into effect on September 16, 2026.
According to the ECB, inflation remains above its medium-term goal of 2% and could stay elevated for an extended period. 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, whereas food inflation remained steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%, and services inflation decreased to 3.0% from 3.3%.
Alongside the interest rate decision, the central bank also presented updated economic projections. The ECB staff anticipates average headline inflation of 3.0% in 2026 and 2.5% in 2027. Looking further ahead, inflation is forecasted at 2.1% in 2028. The projection for 2026 remains unchanged from June, while forecasts for 2027 and 2028 have been revised upward. Inflation excluding energy and food is projected at 2.5% for this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Rises Due to Increasing Energy Costs
ECB President Christine Lagarde stated that rising energy prices have pushed the projected inflation path higher. The central bank now expects headline inflation to stay well above its target into the first half of 2027. Following this period, energy inflation is anticipated to decline and turn negative during parts of 2028. The ECB also indicated that elevated energy prices are expected to gradually influence core and food inflation. According to the central bank’s latest assessment, most long-term inflation expectations remain close to 2%.
Forecasts for economic growth have also been revised upward from previous estimates. The ECB’s staff now projects the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The upward revisions for 2026 and 2027 stem mainly from stronger-than-anticipated economic resilience. Meanwhile, euro area unemployment stayed at 6.4% in July, with employment and labor force growth continuing to slow, although productivity has been gradually improving.
Interest Rate Hikes Impact Borrowing Conditions
Following earlier monetary tightening measures, borrowing costs have already risen. For example, bank lending rates for corporations were at 3.8% in June and July, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates, on the other hand, remained steady at 3.5% during June and July. Additionally, annual growth in bank lending to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0%, according to data provided by the ECB.
The Governing Council emphasized that future interest rate decisions will hinge on incoming economic and financial data. It will also evaluate the inflation outlook, underlying price pressures, and how monetary policy measures are transmitted through the economy. The council did not commit to a specific trajectory for rates. Meanwhile, its asset purchase programs and pandemic emergency purchase portfolios continue to decrease as the Eurosystem stops reinvesting principal from maturing securities. The ECB reaffirmed that its monetary policy remains aimed at restoring inflation to the 2% target over the medium term.