FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points amid ongoing inflation levels surpassing the target. The deposit facility rate will now be 2.50%, up from 2.25%. The main refinancing rate will rise to 2.65%, while the marginal lending rate climbs to 2.90%. These new rates come into effect on September 16, 2026. The ECB partly attributed persistent price pressures to rising energy costs linked to conflicts in the Middle East.
In August, inflation in the euro area reached 3.3%, increasing from 2.9% in July. Energy inflation accelerated notably to 14.3% from 10.3% over the same period. Food inflation held steady at 1.2%. Inflation excluding energy and food decreased slightly to 2.4% from 2.5%. Meanwhile, inflation in services also declined, falling from 3.3% to 3.0%. These data indicate that energy remains a significant driver of inflation, despite some underlying measures moderating during the month.
The ECB also published updated economic forecasts alongside its rate decision. Staff anticipate headline inflation will average 3.0% in 2026 and 2.5% in 2027, with a further projection of 2.1% for 2028. The 2026 forecast remains unchanged from the June estimate, but projections for 2027 and 2028 have been revised upward. Excluding energy and food, inflation is expected to be 2.5% this year, rising to 2.6% in 2027, then decreasing to 2.3% in 2028.
Energy Price Rise Influences Inflation Expectations
ECB President Christine Lagarde explained that higher energy prices have increased the projected inflation trajectory. The central bank forecasts headline inflation to stay well above its 2% target through the first half of 2027. It expects energy inflation to slow and turn negative during parts of 2028. Additionally, the ECB predicts that the rise in energy costs will gradually permeate into food and core prices. Most long-term inflation expectations remain close to 2%, based on its latest analysis.
The economic growth outlook has also improved compared to the June forecast. Staff now project euro area gross domestic product to grow by 0.9% in 2026, with expansions of 1.4% in 2027 and 1.5% in 2028. Forecasts for 2026 and 2027 were revised upward from earlier estimates, reflecting increased resilience in the economy. As of July, euro area unemployment stood at 6.4%, while employment and labor force growth continued to slow.
Eurozone Lending Costs Persist at Elevated Levels
Financing conditions continue to reflect the effects of previous monetary tightening, impacting both households and businesses. Bank lending rates for companies averaged 3.8% in June and July, compared to 3.6% in May. The cost of corporate debt on the market hit 4.0% in July. Meanwhile, mortgage rates remained steady at 3.5% in June and July. Growth in bank lending to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0% in the same period.
The Governing Council noted that future interest rate decisions will depend on incoming economic and financial data. It will examine the inflation outlook, underlying price trends, and how monetary policy impacts the economy. No fixed interest rate path was committed to. Additionally, asset purchase programs and pandemic emergency purchase portfolios continue to shrink as securities mature and are no longer reinvested. The ECB reaffirmed that its policy remains focused on bringing inflation sustainably back to its 2% target over the medium term.