FRANKFURT, GERMANY / RankWire.AI / – European Central Bank increased its three key interest rates by 25 basis points as inflation stayed above the target. The deposit facility rate now stands at 2.50%, up from 2.25%. The main refinancing rate rises to 2.65%, and the marginal lending rate reaches 2.90%. These new rates are set to come into effect on September 16, 2026. The ECB attributed ongoing price pressures partly to higher energy costs linked to conflicts in the Middle East.
Eurozone headline inflation hit 3.3% in August, an increase from 2.9% in July. Energy inflation climbed to 14.3% from 10.3% during the same period. Food inflation remained steady at 1.2%. Meanwhile, inflation excluding energy and food decreased slightly to 2.4% from 2.5%. Inflation in services also declined, dropping to 3.0% from 3.3%. The data indicates energy continues to be a significant source of rising prices, even as several underlying inflation measures eased within the month.
Alongside the rate decision, the central bank released updated economic forecasts. Staff project headline inflation will average 3.0% in 2026 and 2.5% in 2027. For 2028, inflation is forecasted at 2.1%. The 2026 projection remains unchanged from the June forecast, but estimates for 2027 and 2028 have been revised higher. Inflation excluding energy and food is expected to average 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Energy Price Rise Influences Inflation Expectations
ECB President Christine Lagarde explained that higher energy prices have elevated the projected inflation path. The bank anticipates headline inflation will stay well above its 2% target into the first half of 2027. Afterward, energy inflation is expected to decline and turn negative during parts of 2028. The ECB also forecasts that the increased energy costs will gradually pass through to food and core prices. According to its latest assessment, most measures of longer-term inflation expectations remain near 2%.
The growth outlook also improved compared to previous forecasts. Staff now expect euro area gross domestic product to grow by 0.9% in 2026, with projected increases of 1.4% in 2027 and 1.5% in 2028. Forecasts for 2026 and 2027 have been raised since June. The central bank highlighted stronger economic resilience in its updated outlook. In July, euro area unemployment was at 6.4%, with employment and labor force growth continuing to slow.
High Borrowing Costs Persist Across the Eurozone
Financial conditions still reflect earlier monetary tightening, affecting households and companies. The average bank lending rate for firms was 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 both June and July. Meanwhile, annual 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 stated that upcoming rate decisions will depend on incoming economic and financial data. It will review the inflation outlook, underlying price trends, and the effects of monetary policy on the economy. The council did not commit to a predetermined interest rate path. The asset purchase and pandemic emergency purchase portfolios continue to diminish as maturing securities are no longer reinvested. The European Central Bank emphasized that its policy remains focused on restoring inflation to its 2% target sustainably over the medium term.