FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points as inflation remained above the target level. The deposit facility rate will now be 2.50%, up from 2.25%. The main refinancing rate will be adjusted to 2.65%, and the marginal lending rate will reach 2.90%. These new rates will come into effect on September 16, 2026. The ECB partly attributed persistent inflationary pressures to higher energy costs linked to conflict in the Middle East.
In August, headline inflation in the euro area hit 3.3%, marking an increase from 2.9% in July. Energy prices surged to 14.3%, from 10.3% during the same period. Food inflation stayed steady at 1.2%. Meanwhile, inflation excluding energy and food declined slightly to 2.4% from 2.5%. Services inflation also decreased, falling to 3.0% from 3.3%. These figures indicate that energy continues to be a significant driver of inflation despite a moderation in some underlying inflation measures throughout the month.
Alongside the rate decision, the central bank published updated economic projections. Officials anticipate that headline inflation will average 3.0% in 2026 and 2.5% in 2027, with a further estimate of 2.1% for 2028. The 2026 forecast remained unchanged from the June projection, but projections for 2027 and 2028 were revised upward. Inflation excluding energy and food is expected to average 2.5% this year, increase to 2.6% in 2027, and slightly decrease to 2.3% in 2028.
Energy Prices Drive Up Inflation Expectations
ECB President Christine Lagarde stated that rising energy prices have elevated the projected inflation path. The bank anticipates that headline inflation will stay significantly above its 2% target into the first half of 2027. After that, energy inflation is expected to ease and potentially turn negative during parts of 2028. The ECB also predicts that higher energy costs will gradually influence food and core prices. Most measures of long-term inflation expectations remain near 2%, according to the latest assessment.
The economic growth outlook has also improved compared to previous forecasts. The staff now project euro area gross domestic product to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Forecasts for 2026 and 2027 saw an upward revision from June. The central bank highlighted increased economic resilience in its latest evaluation. As of July, euro area unemployment was at 6.4%, with employment and labor force growth continuing to slow.
Euro Area Borrowing Costs Remain Elevated
Financial conditions still reflect the effects of earlier monetary tightening, affecting both households and businesses. In June and July, the average bank lending rate for companies was 3.8%, compared to 3.6% in May. The cost of market-based corporate debt reached 4.0% in July, while mortgage rates remained steady at 3.5% in June and July. Meanwhile, annual growth in bank lending to companies increased to 4.4% in July, though mortgage lending growth slowed to 3.0% during the same period.
The Governing Council emphasized that future interest rate decisions will depend on incoming economic and financial data. The assessment will include the inflation outlook, underlying price trends, and the impacts of monetary policy on the economy. The council did not specify any predetermined path for interest rates. The portfolios for asset purchases and pandemic emergency purchases continue to decrease as maturing securities are no longer reinvested. The ECB reaffirmed that its primary focus remains on returning inflation sustainably to its 2% target over the medium term.