FRANKFURT, GERMANY / RankWire.AI / – European Central Bank increased its three principal interest rates by 25 basis points as inflation continued to stay above the target. The rate for the deposit facility was raised to 2.50% from 2.25%. The main refinancing rate moved up to 2.65%, and the marginal lending rate reached 2.90%. These updated rates are set to take effect on September 16, 2026. The ECB attributed ongoing price pressures partly to higher energy costs linked to conflicts in the Middle East.
In August, euro area headline inflation hit 3.3%, up from 2.9% in July. Over the same period, energy inflation surged to 14.3% from 10.3%. Food inflation remained steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%. Inflation in services also declined, falling to 3.0% from 3.3%. These figures indicate that energy continues to be a significant contributor to inflationary pressures, despite some underlying measures of inflation easing during the month.
Alongside the rate decision, the central bank released updated economic forecasts. Staff project headline inflation to average 3.0% in 2026 and 2.5% in 2027, with a further decline to 2.1% in 2028. The 2026 forecast remains unchanged from the June prediction, but estimates for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to average 2.5% this year, then 2.6% in 2027, and 2.3% in 2028.
Energy Costs Influence the Inflation Outlook
ECB President Christine Lagarde stated that higher energy prices have contributed to the upward revision of the inflation path. The bank anticipates that headline inflation will remain significantly above its 2% target into the first half of 2027. Afterward, energy inflation is expected to decrease and possibly turn negative during some parts of 2028. The ECB also forecasts that the increase in energy costs will gradually be reflected in food prices and core inflation. According to its latest review, most measures of longer-term inflation expectations stay close to 2%.
The economic growth outlook has also been upgraded compared to the previous forecast. Now, staff expect the euro area’s gross domestic product to grow by 0.9% in 2026. For 2027, growth is projected at 1.4%, and for 2028, at 1.5%. These forecasts for 2026 and 2027 were revised upward from June. The central bank highlighted increased economic resilience in its recent assessment. Euro area unemployment was recorded at 6.4% in July, with employment and labor force growth continuing to slow.
High Borrowing Costs Persist Across the Eurozone
Financial conditions still reflect the earlier monetary tightening, affecting both households and companies. In June and July, the average bank lending rate for firms was 3.8%, compared to 3.6% in May. The cost of corporate debt on the market reached 4.0% in July. Mortgage rates remained steady at 3.5% during June and July. Meanwhile, annual bank lending growth to companies increased to 4.4% in July, while mortgage lending growth slowed to 3.0% during the same period.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial data. It will evaluate the inflation outlook, core price trends, and the impact of monetary policy measures on the economy. The council did not commit to a predefined interest rate trajectory. The portfolios for asset purchases and pandemic emergency purchase programs continue to diminish as maturing securities are no longer reinvested. The European Central Bank reaffirmed that its primary objective remains to bring inflation back to its 2% target sustainably over the medium term.