FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points as inflation persisted above its target. The deposit facility rate will now be at 2.50%, up from 2.25%. Meanwhile, the main refinancing rate will move to 2.65%, and the marginal lending rate will reach 2.90%. These new rates are set to come into effect on September 16, 2026. The ECB attributed ongoing price pressures partly to increased energy costs linked to conflicts in the Middle East.
In August, the euro area’s headline inflation hit 3.3%, marking an increase from 2.9% in July. Energy inflation sped up to 14.3% from 10.3% over the same period. Food inflation remained steady at 1.2%. Conversely, inflation excluding energy and food decreased slightly to 2.4% from 2.5%. Inflation in services also declined, falling to 3.0% from 3.3%. These figures indicate that energy prices continue to exert significant upward pressure on overall inflation, even as several underlying inflation indicators showed signs of moderation during the month.
Alongside its rate decision, the central bank published updated economic projections. According to staff forecasts, headline inflation is expected to average 3.0% in 2026 and 2.5% in 2027, with a further decrease to 2.1% projected for 2028. The 2026 estimate remained unchanged from the forecast made in June, but projections for 2027 and 2028 were revised upward. Expectations for inflation excluding energy and food are set at an average of 2.5% in 2023, 2.6% in 2027, and 2.3% in 2028.
Higher energy prices influence inflation expectations
ECB President Christine Lagarde stated that rising energy prices have contributed to an upward revision of the inflation trajectory. The bank now anticipates that headline inflation will remain significantly above its 2% target into the first half of 2027, with energy inflation expected to ease afterward and turn negative at times during 2028. The ECB also forecasts that these increased energy costs will gradually pass through to food prices and other core components of inflation. According to the latest assessment, most measures of longer-term inflation expectations stay close to 2%.
The economic growth outlook has improved since the previous forecast, with staff now projecting the euro area’s gross domestic product to grow by 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. These forecasts for 2026 and 2027 were raised from the June projections, with the central bank citing stronger economic resilience. As of July, euro area unemployment stood at 6.4%, with employment and labor force growth continuing to slow.
Loan costs remain high across the eurozone
Lending conditions still reflect the effects of previous monetary tightening, impacting households and firms alike. For example, average bank lending rates for corporations were 3.8% in June and July, compared to 3.6% in May. The cost of corporate debt in the market reached 4.0% during July. Mortgage rates held steady at 3.5% in both June and July. In July, annual bank lending growth to businesses increased to 4.4%, whereas mortgage lending growth slowed to 3.0%. The Governing Council clarified that future rate decisions will be contingent on incoming economic and financial data, including assessments of inflation prospects, underlying price trends, and the impact of monetary policy measures. The council did not commit to any predetermined interest rate path. Additionally, asset purchase programs, including pandemic emergency purchase portfolios, continue to diminish as maturing securities are no longer reinvested. The ECB reaffirmed that its overarching goal remains to bring inflation back to its 2% target over the medium term.