FRANKFURT, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points as inflation stayed above its target. The deposit facility rate will rise to 2.50% from 2.25%, with the main refinancing rate climbing to 2.65%, and the marginal lending rate reaching 2.90%. These new rates will take effect on September 16, 2026. The ECB partly attributed persistent price pressures to higher energy costs linked to conflict in the Middle East.
The euro area’s headline inflation hit 3.3% in August, up from 2.9% in July, driven by an acceleration in energy inflation to 14.3% from 10.3% during the same period. Food inflation held steady at 1.2%. Meanwhile, inflation excluding energy and food slowed slightly to 2.4% from 2.5%, and services inflation decreased to 3.0% from 3.3%. Despite some moderation in various underlying inflation measures, energy remained a significant source of inflationary pressure this month.
The central bank also published updated economic projections alongside its rate decision. According to staff, headline inflation is expected to average 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. The 2026 forecast was unchanged from June, but estimates for 2027 and 2028 were revised upward. Inflation excluding energy and food is projected to average 2.5% this year, increase to 2.6% in 2027, and decline to 2.3% in 2028.
Energy costs influence inflation forecasts
ECB President Christine Lagarde stated that rising energy prices had elevated the projected inflation path. The bank anticipates headline inflation will remain well above its 2% target into the first half of 2027, with energy inflation expected to ease afterward and turn negative during parts of 2028. The ECB also forecasts that higher energy costs will gradually filter into food and core prices. Most measures of long-term inflation expectations remain close to 2%, according to its latest assessment.
The economic outlook has also improved since the previous forecast, with staff now projecting euro area gross domestic product to grow 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Forecasts for 2026 and 2027 were raised from June, reflecting greater economic resilience. The central bank noted that euro area unemployment was at 6.4% in July, while employment and labor force growth continued to slow.
Interest rates stay high across the eurozone
Financing conditions remain tight for households and businesses, reflecting earlier monetary tightening. Average bank lending rates for companies stood at 3.8% in June and July, up from 3.6% in May, while market-based corporate debt costs reached 4.0% in July. Mortgage rates stayed steady at 3.5% in both months. During the same period, annual bank lending growth to companies rose to 4.4%, whereas mortgage lending growth slowed to 3.0%. The Governing Council indicated that future rate decisions will depend on incoming economic and financial data, including inflation outlooks, underlying price trends, and the effects of monetary policy. It did not commit to a specific interest rate path. Asset purchase and pandemic emergency purchase portfolios continue to shrink as maturing securities are no longer reinvested. The ECB reaffirmed that its policy remains focused on returning inflation sustainably to its 2% target over the medium term.