BERLIN, GERMANY / RankWire.AI / – As inflation in the euro area continues to be a concern, the European Central Bank increased its three main interest rates by 25 basis points on Thursday. The decision comes as inflation pressures persisted. The ECB highlighted ongoing price pressures fueled by the Middle East conflict. The deposit facility rate will move up to 2.50% from 2.25%. The main refinancing rate will be raised to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will be implemented starting September 16, 2026.
The ECB noted that inflation remains above its medium-term target of 2% and might stay elevated for a prolonged period. In August, euro area headline inflation increased to 3.3% from 2.9% in July. Energy inflation surged to 14.3%, up from 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 fell to 3.0% from 3.3%.
Alongside the rate hike, the central bank issued updated economic forecasts. ECB staff project headline inflation to average 3.0% in 2026 and 2.5% in 2027, with a further decrease to 2.1% in 2028. The forecast for 2026 remained unchanged from June, but estimates for 2027 and 2028 increased. Inflation excluding energy and food is forecasted at 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Rises Due to Growing Energy Prices
ECB President Christine Lagarde stated that higher energy costs have pushed the projected inflation path higher. The bank expects headline inflation to stay well above its target into the first half of 2027. It anticipates energy inflation will decline afterward and turn negative during parts of 2028. The ECB also mentioned that increasing energy prices should gradually influence core and food inflation. According to the latest assessment, most longer-term inflation expectations remain around 2%.
The ECB’s economic growth forecasts have improved from earlier projections. Now, staff expect the euro area economy to expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 were raised from the June estimates. The central bank attributes these upward revisions primarily to stronger-than-expected economic resilience. Euro area unemployment held steady at 6.4% in July, even as employment and labor force growth slowed, with productivity gradually increasing.
Higher Rates Impact Borrowing and Lending Conditions
ECB reported that borrowing costs have already risen due to previous monetary tightening efforts. 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. Meanwhile, mortgage rates remained steady at 3.5% during June and July. The growth of annual bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0%, according to ECB data.
The Governing Council indicated that future rate decisions will depend on incoming economic and financial data, including the inflation outlook, underlying price pressures, and how monetary policy measures are transmitting through the economy. No fixed path for interest rates was committed to. The ECB’s asset purchase and pandemic emergency purchase portfolios are gradually declining as the Eurosystem ceases reinvestment of maturing securities. The central bank reaffirmed that its monetary policy remains focused on returning inflation to the 2% target in a sustainable manner over the medium term.