FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three primary interest rates by 25 basis points as inflation persisted above the targeted level. The deposit facility rate is now 2.50%, up from 2.25%. The main refinancing rate has been raised to 2.65%, with the marginal lending rate reaching 2.90%. These new rates will be effective from September 16, 2026. The ECB attributed ongoing inflationary pressure partly to rising energy costs linked to conflicts in the Middle East.
In August, the euro area’s headline inflation hit 3.3%, an increase from 2.9% in July. Energy inflation accelerated to 14.3% from 10.3% during the same period. Food inflation held steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%. The inflation rate for services also decreased, falling to 3.0% from 3.3%. These figures show that energy remained a significant driver of price increases despite some moderation in various underlying inflation measures throughout the month.
Alongside its rate decision, the central bank published updated economic projections. Staff anticipate that headline inflation will average 3.0% in 2026 and 2.5% in 2027, with a forecast of 2.1% for 2028. The 2026 projection remains unchanged from the forecast made in June, but the outlooks for 2027 and 2028 have been revised upward. The expected average for inflation excluding energy and food is 2.5% this year, rising slightly to 2.6% in 2027, then declining to 2.3% in 2028.
Energy costs influence inflation forecasts
ECB President Christine Lagarde stated that increased energy prices have led to a higher projected inflation path. The bank expects headline inflation to stay significantly above its 2% target through the first half of 2027. Afterward, energy inflation is forecasted to ease and turn negative during parts of 2028. The ECB also predicts that rising energy costs will gradually impact food and core prices. According to its latest evaluation, most measures of longer-term inflation expectations remain close to 2%.
The economic growth outlook has improved compared to the previous forecast cycle. Staff now project euro area gross domestic product to grow by 0.9% in 2026, with increases of 1.4% in 2027 and 1.5% in 2028. Forecasts for 2026 and 2027 were raised from the June projections, reflecting stronger economic resilience in the updated assessment. Euro area unemployment stood at 6.4% in July, while employment growth and the labor force expansion have continued to slow.
Cost of borrowing remains high across the euro zone
Lending conditions continue to mirror the previous monetary tightening, affecting both households and businesses. The average bank lending rate for companies was 3.8% in June and July, compared to 3.6% in May. The cost of corporate debt issued in the market reached 4.0% in July. Mortgage rates held steady at 3.5% in June and July. During this period, annual growth in bank lending to companies increased to 4.4%, while mortgage lending growth slowed down to 3.0%.
The Governing Council indicated that future interest rate decisions will depend on incoming economic and financial data. It will review the inflation outlook, underlying price trends, and the effects of monetary policy on the economy. The council did not commit to a specific interest rate trajectory. Additionally, asset purchase programs, including pandemic emergency purchase portfolios, continue to decline as securities mature and are no longer reinvested. The European Central Bank reaffirmed its commitment to restoring inflation to its 2% target sustainably over the medium term.