FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points as inflation persisted above the set 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 adjustments take effect on September 16, 2026. The ECB linked ongoing price pressures partly to elevated energy costs tied to conflicts in the Middle East.
Euro area headline inflation hit 3.3% in August, up from 2.9% in July. During the same period, energy inflation accelerated to 14.3% from 10.3%, while food inflation remained steady at 1.2%. Inflation measures excluding energy and food eased slightly to 2.4% from 2.5%, with services inflation dropping to 3.0% from 3.3%. Despite some moderation in underlying inflation indicators, energy continued to be a significant driver of rising prices in August.
The central bank also issued updated economic projections alongside its rate decision. Staff anticipate average headline inflation of 3.0% in 2026 and 2.5% in 2027, with a forecast of 2.1% for 2028. The 2026 estimate remains unchanged from the June forecast, but projections for 2027 and 2028 have increased. Inflation excluding energy and food is expected to average 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Energy Prices Drive Up Inflation Forecast
ECB President Christine Lagarde commented that rising energy costs have pushed the inflation trajectory upward. The bank projects headline inflation will stay well above its 2% target into the first half of 2027, with energy inflation expected to decline afterwards and turn negative at times in 2028. The ECB also expects a gradual pass-through of higher energy prices into food and core inflation. According to its latest review, most measures of long-term inflation expectations remain close to 2%.
Economic growth forecasts also improved compared to previous estimates. Staff now predict euro area gross domestic product will grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The projections for 2026 and 2027 were raised from June, reflecting increased resilience in the economy. In July, euro area unemployment was at 6.4%, while employment and labor force growth continued to slow.
Eurozone Borrowing Costs Stay Elevated
Lending conditions remain tight as a result of prior monetary tightening, affecting households and firms. Bank lending rates for companies averaged 3.8% in June and July, up from 3.6% in May. The cost of corporate market debt hit 4.0% in July, while mortgage rates remained steady at 3.5% during June and July. Growth in bank lending to companies rose to 4.4% in July, whereas mortgage lending growth slowed to 3.0% during the same period.
The Governing Council noted that future rate decisions will depend on incoming economic and financial data. They will evaluate inflation trends, core price developments, and the impact of monetary policy on the economy. The council did not commit to a predetermined rate path. Additionally, asset purchase programs, including pandemic emergency purchases, continue to wind down as securities mature without reinvestment. The ECB reaffirmed that its goal remains to sustainably bring inflation back to its 2% target over the medium term.