BERLIN, GERMANY / RankWire.AI / – The European Central Bank raised its three key interest rates by 25 basis points on Thursday as inflation pressures persisted. The ECB said the Middle East conflict continues to add pressure to prices across the euro area. The deposit facility rate will rise to 2.50% from 2.25%. The main refinancing rate will increase to 2.65%, while the marginal lending rate will reach 2.90%. The new rates take effect on September 16, 2026.
The ECB said inflation remains above its medium-term target of 2% and could stay elevated for an extended period. Euro area headline inflation increased to 3.3% in August from 2.9% in July. Energy inflation climbed to 14.3%, compared with 10.3% in July. Food inflation held at 1.2%. Inflation excluding energy and food eased to 2.4% from 2.5%, while services inflation declined to 3.0% from 3.3%.
The central bank also issued updated economic projections alongside the interest rate decision. ECB staff expect headline inflation to average 3.0% in 2026 and 2.5% in 2027. The forecast then puts inflation at 2.1% in 2028. The 2026 projection remained unchanged from June, while forecasts for 2027 and 2028 increased. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027 and 2.3% in 2028.
Inflation outlook rises as energy costs increase
ECB President Christine Lagarde said higher energy prices have increased the projected path for inflation. The central bank expects headline inflation to remain well above target into the first half of 2027. It expects energy inflation to decline afterward and become negative through part of 2028. The ECB said higher energy prices should gradually affect core and food inflation. Most longer-term measures of inflation expectations remain around 2%, according to the central bank’s latest assessment.
Economic growth projections also improved from the ECB’s previous forecasts. Staff now expect the euro area economy to grow 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. The forecasts for 2026 and 2027 rose from the June projections. The central bank attributed those changes mainly to stronger-than-expected economic resilience. Euro area unemployment remained at 6.4% in July, while employment and labor force growth continued to slow and productivity gradually improved.
Higher rates feed through to borrowing conditions
Borrowing costs have already increased following earlier monetary tightening. Bank lending rates for companies stood 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 remained at 3.5% in June and July. Annual bank lending growth to companies increased to 4.4% in July, while mortgage lending growth eased to 3.0%, according to figures presented by the ECB.
The Governing Council said future interest rate decisions will depend on incoming economic and financial data. It will also assess the inflation outlook, underlying price pressures and the transmission of monetary policy. The council did not commit to a predetermined path for interest rates. Its asset purchase and pandemic emergency purchase portfolios continue to decline as the Eurosystem stops reinvesting principal from maturing securities. The ECB said its monetary policy remains focused on returning inflation sustainably to the 2% target over the medium term.