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 will now be 2.50%, up from 2.25%. The main refinancing rate will go up to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to take effect on September 16, 2026. The ECB partly attributed ongoing inflationary pressures to rising energy prices linked to the conflict in the Middle East.
In August, euro area headline inflation climbed to 3.3%, compared to 2.9% in July. Energy inflation surged to 14.3% from 10.3%, while food inflation held steady at 1.2%. Inflation excluding energy and food eased slightly to 2.4% from 2.5%, and services inflation declined to 3.0% from 3.3%. The data indicates that energy remains a significant driver of inflation, even as some underlying inflation measures showed signs of moderation during the month.
Alongside its rate decision, the ECB also issued updated economic projections. Staff now forecast that headline inflation will average 3.0% in 2026 and 2.5% in 2027, with a further decrease to 2.1% in 2028. The 2026 projection remained unchanged from the June forecast, while estimates for 2027 and 2028 were revised upward. Excluding energy and food, inflation is expected to average 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Energy prices influence inflation projections
ECB President Christine Lagarde indicated that increased energy costs have pushed the inflation outlook higher. The ECB anticipates that headline inflation will stay well above its 2% target into the first half of 2027. Energy inflation is expected to decline after that, potentially turning negative during parts of 2028. The bank also expects that the rise in energy prices will gradually influence food and core prices. According to its latest assessment, most measures of longer-term inflation expectations remain close to 2%.
The economic growth outlook has been upgraded compared to previous forecasts. The ECB now projects euro area gross domestic product to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The forecasts for 2026 and 2027 have been raised since June. The central bank cited increased economic resilience as a reason for the improved outlook. In July, euro area unemployment was 6.4%, with employment and labor force growth continuing to slow.
Eurozone borrowing costs remain high
Lending conditions continue to reflect the effects of previous monetary tightening for households and businesses. In June and July, average bank lending rates for companies stood at 3.8%, up from 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates remained steady at 3.5% throughout June and July. Meanwhile, annual growth in bank lending to companies increased to 4.4% in July, whereas mortgage lending growth slowed to 3.0% during the same period.
The Governing Council emphasized that future rate decisions will be data-dependent, considering economic and financial developments, inflation outlook, underlying price trends, and the impact of monetary policy. It did not specify a predetermined path for interest rates. The asset purchase programs, including pandemic emergency purchases, are ongoing in their reduction as maturing securities are no longer reinvested. The ECB reaffirmed that its overarching goal remains to bring inflation back to its 2% target in a sustainable manner over the medium term.