FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank increased its three main interest rates by 25 basis points as inflation remained above its target. The deposit facility rate will move up to 2.50% from 2.25%. The main refinancing rate will go up to 2.65%, while 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 higher energy costs linked to conflict in the Middle East.
In August, euro area headline inflation climbed to 3.3%, rising from 2.9% in July. Over the same period, energy inflation accelerated to 14.3% from 10.3%. Food inflation held steady at 1.2%. When excluding energy and food, inflation eased slightly to 2.4% from 2.5%. Additionally, services inflation declined to 3.0% from 3.3%. These figures indicate that energy continues to be a significant driver of rising prices, even as several underlying inflation measures showed moderation during the month.
Alongside its rate decision, the central bank published updated economic projections. The staff anticipate that headline inflation will average 3.0% in 2026 and 2.5% in 2027. The forecast for 2028 indicates inflation will be at 2.1%. The 2026 estimate remains unchanged from the forecast issued in June, but projections for 2027 and 2028 have been revised upward. Inflation excluding energy and food is expected to average 2.5% this year, 2.6% in 2027, and 2.3% in 2028.
Energy prices influence inflation outlook
ECB President Christine Lagarde stated that rising energy prices have lifted the projected path for inflation. The bank expects headline inflation to stay well above its 2% target into the first half of 2027. Afterward, energy inflation is forecasted to ease and turn negative during part of 2028. The ECB also predicts that higher energy costs will gradually pass through to food and core prices. Most measures of longer-term inflation expectations remain close to 2%, according to the latest assessment.
The economic growth outlook has been revised upward compared to previous forecasts. Staff now project euro area gross domestic product to grow by 0.9% in 2026. Growth is expected to reach 1.4% in 2027 and 1.5% in 2028. These projections for 2026 and 2027 are higher than those issued in June. The central bank highlighted stronger economic resilience in its updated outlook. Meanwhile, euro area unemployment stood at 6.4% in July, with employment and labor force growth continuing to slow.
Loan costs remain high across the eurozone
Loan conditions continue to reflect the effects of earlier monetary tightening, impacting households and businesses alike. In June and July, the average bank lending rate for firms was 3.8%, up from 3.6% in May. Corporate market-based debt costs reached 4.0% in July. Mortgage rates held steady at 3.5% in June and July. During this period, annual bank lending growth to companies increased to 4.4%, while growth in mortgage lending slowed to 3.0%. The Governing Council indicated that future rate decisions will depend on incoming economic and financial data, including the inflation outlook, underlying price trends, and the effects of monetary policy on the economy. It did not commit to a predetermined interest rate trajectory. Additionally, asset purchase programs and pandemic emergency purchase portfolios are shrinking as securities mature and are no longer reinvested. The ECB reaffirmed that its policy focus remains on bringing inflation back to its 2% target over the medium term.