BERLIN, GERMANY / RankWire.AI / – European Central Bank increased its three main interest rates by 25 basis points on Thursday as inflation pressures persisted. The ECB indicated that ongoing conflicts in the Middle East continue to exert upward pressure on prices throughout the euro area. The deposit facility rate will now rise to 2.50% from 2.25%. The main refinancing rate is set to increase to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are scheduled to be implemented on September 16, 2026.
According to the ECB, inflation remains above its medium-term objective of 2% and could remain elevated for a prolonged period. Euro area headline inflation climbed to 3.3% in August from 2.9% in July. Energy inflation surged to 14.3%, compared to 10.3% in July. Food inflation stayed steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%, while inflation in services declined to 3.0% from 3.3%.
Alongside the rate decision, the ECB published updated economic forecasts. Its staff project that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The projections for 2028 show inflation decreasing to 2.1%. The 2026 forecast remained unchanged from June, whereas estimates for 2027 and 2028 were revised upward. Inflation excluding energy and food is expected to be 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.
Inflation Outlook Elevated Due to Rising Energy Costs
ECB President Christine Lagarde stated that higher energy prices have pushed the inflation path upward. The central bank forecasts that headline inflation will remain significantly above the target into the first half of 2027. It expects energy inflation to eventually decline and turn negative during parts of 2028. The ECB highlighted that rising energy costs should gradually influence core and food inflation. The latest assessment indicates that most longer-term inflation expectations remain close to 2%.
Economic growth projections have been revised upward from previous forecasts. The ECB now anticipates the euro area economy will expand by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These upward revisions for 2026 and 2027 are mainly attributed to stronger-than-expected economic resilience. The unemployment rate in the euro area remained steady at 6.4% in July, although employment and labor force growth continued to slow while productivity showed gradual improvement.
Interest Rate Increases Impact Borrowing Conditions
Following prior monetary tightening, borrowing costs have already risen. Bank lending rates for companies were at 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 held at 3.5% during June and July. The growth rate of annual bank lending to companies increased to 4.4% in July, while mortgage lending growth eased to 3.0%, according to data provided by the ECB.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial data. The assessment will include the inflation outlook, underlying price pressures, and the transmission of monetary policy. No predetermined path for interest rates has been committed to. The ECB’s asset purchase and pandemic emergency purchase portfolios are still declining as the Eurosystem ceases reinvestment of principal from maturing securities. The central bank reaffirmed that its monetary policy remains aimed at sustainably restoring inflation to the 2% target over the medium term.