FRANKFURT, GERMANY / RankWire.AI / – In a move influenced by persistent inflation pressures, the European Central Bank increased its three main interest rates by 25 basis points. This adjustment was driven by inflation that remained above the target, prompting the ECB to raise the deposit facility rate to 2.50% from 2.25%. The main refinancing rate will now be 2.65%, with the marginal lending rate reaching 2.90%. These new rates are set to take effect on September 16, 2026. The ECB also attributed ongoing inflationary pressures partly to higher energy costs linked to conflicts in the Middle East.
Eurozone headline inflation climbed to 3.3% in August, up from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% during the same period. Food inflation remained stable at 1.2%. Meanwhile, inflation excluding energy and food decreased slightly to 2.4% from 2.5%. Inflation in the services sector also saw a decline, falling from 3.3% to 3.0%. The report highlighted that energy remains a significant contributor to price increases, even as several core inflation indicators showed signs of moderation throughout the month.
Alongside the rate hike, the central bank issued updated economic forecasts. According to staff projections, headline inflation is expected to average 3.0% in 2026 and 2.5% in 2027, with a forecast of 2.1% in 2028. The 2026 forecast remained unchanged from the June prediction, but estimates for 2027 and 2028 were revised upward. Inflation excluding energy and food is anticipated to average 2.5% this year, then 2.6% in 2027 and 2.3% in 2028.
Energy Price Rise Shapes Inflation Outlook
ECB President Christine Lagarde stated that rising energy prices have elevated the forecasted inflation trajectory. The bank predicts that headline inflation will stay significantly above its 2% target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative during parts of 2028. The ECB also foresees a gradual pass-through of higher energy costs into food and core prices. Despite these shifts, most measures of long-term inflation expectations remain close to 2%, according to its latest assessment.
The economic growth outlook has also improved relative to previous forecasts. Staff now project euro area gross domestic product to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These projections for 2026 and 2027 were revised upward from June. The ECB pointed to increased economic resilience in its recent evaluation. Unemployment in the euro area was recorded at 6.4% in July, while growth in employment and the labor force continued to slow.
Euro Area Lending Rates and Future Policy Stance
Conditions for borrowing persist at elevated levels across households and businesses due to earlier monetary tightening. The average bank lending rate for firms stood at 3.8% in June and July, compared to 3.6% in May. The cost of corporate debt in the market reached 4.0% in July. Mortgage rates held steady at 3.5% throughout June and July. Growth in bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0% during the same period.
The Governing Council indicated that future rate decisions will depend on incoming economic and financial data. It will evaluate the inflation outlook, underlying price trends, and the impact of monetary policy on the economy. No specific interest rate path was committed to. Asset purchase programs, including pandemic emergency purchases, are continuing to shrink as securities mature without reinvestment. The ECB reaffirmed that its policy remains focused on returning inflation sustainably to its 2% target over the medium term.