BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points on Thursday in response to ongoing inflationary pressures, with the inflation figures remaining elevated. The ECB noted that the conflict in the Middle East continues to exert upward pressure on prices across the eurozone. As a result, the deposit facility rate will be raised to 2.50% from 2.25%, the main refinancing rate will go up to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will become effective on September 16, 2026.
According to the ECB, inflation remains above its medium-term goal of 2%, and there is a risk that it could stay high for a prolonged period. The euro area’s headline inflation increased to 3.3% in August from 2.9% in July, with energy inflation climbing to 14.3%, compared to 10.3% in July. Food inflation held steady at 1.2%, while inflation excluding energy and food eased slightly to 2.4% from 2.5%. Meanwhile, inflation in services declined to 3.0% from 3.3%.
Alongside the interest rate adjustments, the ECB also released updated economic projections, with staff now expecting headline inflation to average 3.0% in 2026 and 2.5% in 2027, followed by a forecast of 2.1% in 2028. The 2026 projection remained consistent with June’s outlook, but estimates for 2027 and 2028 have been revised upward. For inflation excluding energy and food, the forecasts are 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Inflation outlook adjusts upward due to rising energy prices
ECB President Christine Lagarde stated that increasing energy costs have pushed the inflation projection higher, with the central bank expecting headline inflation to stay well above the target through the first half of 2027. She added that energy inflation is anticipated to decline afterward and could turn negative during some periods of 2028. The ECB further explained that higher energy prices are expected to gradually influence core and food inflation, with most longer-term inflation expectations remaining around 2%, based on its latest assessment.
Projections for economic growth also saw an upward revision compared to previous forecasts. ECB staff now anticipate that the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028, with the forecasts for 2026 and 2027 rising from those issued in June. The central bank attributes these improvements primarily to stronger-than-expected economic resilience. Unemployment in the eurozone remained at 6.4% in July, while employment and labor force growth continued to slow, though productivity gradually increased.
Rising interest rates are impacting borrowing conditions
European Central Bank indicated that borrowing costs have already gone up following earlier monetary tightening measures. For instance, bank lending rates to companies were 3.8% in June and July, up from 3.6% in May, while the cost of market-based corporate debt reached 4.0% in July. Mortgage rates remained steady at 3.5% during June and July. The ECB also 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 central bank.
The Governing Council emphasized that future interest rate decisions will be contingent on incoming economic and financial data, including assessments of the inflation outlook, underlying price pressures, and how effectively monetary policy is transmitted. It clarified that no predetermined path for rate changes has been set. The ECB’s asset purchase programs, including the pandemic emergency purchase portfolio, continue to decline as the Eurosystem ceases reinvestment of principal from maturing securities. The overarching goal remains to steer inflation back sustainably to the 2% target over the medium term.