FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points as inflation continued to stay above the target level. The deposit facility rate has been raised to 2.50% from 2.25%. Meanwhile, 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. The ECB attributed ongoing inflationary pressures partly to increased energy costs linked to the conflict in the Middle East.
In August, the euro area’s headline inflation hit 3.3%, up from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in the previous month. Food inflation held steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%. Additionally, services inflation declined to 3.0% from 3.3%. The data indicated that energy remained a significant driver of inflation despite moderation in some underlying measures during the month.
Alongside its rate decision, the central bank issued updated economic forecasts. Officials project that headline inflation will average 3.0% in 2026, decrease to 2.5% in 2027, and then settle at 2.1% in 2028. The 2026 estimate remained unchanged from the June forecast, but projections for 2027 and 2028 were revised upward. Excluding energy and food, inflation is expected to average 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Energy Prices Drive Up Inflation Expectations
ECB President Christine Lagarde stated that higher energy prices have elevated the inflation outlook. The bank anticipates headline inflation to remain well above its 2% target through the first half of 2027. Afterward, energy inflation is expected to ease and even turn negative during parts of 2028. The ECB also predicts that rising energy costs will gradually spill over into food and core prices. According to its latest assessment, most measures of longer-term inflation expectations stay close to 2%.
The economic growth outlook has also been revised upward compared to previous projections. Staff now forecast euro area gross domestic product to grow by 0.9% in 2026, with increases of 1.4% in 2027 and 1.5% in 2028. The forecasts for 2026 and 2027 have been revised upward since June. The central bank highlighted increased economic resilience in its updated evaluation. Euro area unemployment stood at 6.4% in July, with employment and labor force growth continuing to slow.
Loan and Borrowing Conditions Stay Elevated Across the Eurozone
Lending conditions remain tight following earlier monetary tightening, affecting households and businesses. The average bank lending rate for companies reached 3.8% in June and July, up from 3.6% in May. The cost of corporate debt on the market hit 4.0% in July. Mortgage rates held steady at 3.5% in both June and July. During the same period, annual bank lending growth to companies rose to 4.4%, while mortgage lending growth slowed to 3.0%.
The Governing Council indicated that upcoming rate decisions will be influenced by incoming economic and financial data. It will evaluate the inflation outlook, underlying price trends, and the impact of monetary policy on the economy. The council did not commit to a specific interest rate trajectory. Asset purchase programs, including pandemic emergency purchase portfolios, are continuing to diminish as maturing securities are no longer reinvested. The ECB reaffirmed that its policy aims to bring inflation back to its 2% target sustainably over the medium term.