FRANKFURT, GERMANY / RankWire.AI / – The European Central Bank raised its three key interest rates by 25 basis points as inflation remained above target. The deposit facility rate will increase to 2.50% from 2.25%. The main refinancing rate will rise to 2.65%, while the marginal lending rate will reach 2.90%. The new rates take effect on September 16, 2026. The ECB linked persistent price pressure partly to higher energy costs associated with conflict in the Middle East.
Euro area headline inflation reached 3.3% in August, up from 2.9% in July. Energy inflation accelerated to 14.3% from 10.3% over the same period. Food inflation remained at 1.2%. Inflation excluding energy and food eased to 2.4% from 2.5%. Services inflation also declined, falling to 3.0% from 3.3%. The figures showed that energy remained a major source of price pressure even as several underlying inflation measures moderated during the month.
The central bank also released updated economic projections with its rate decision. Staff expect headline inflation to average 3.0% in 2026 and 2.5% in 2027. Inflation is then projected at 2.1% in 2028. The 2026 estimate was unchanged from the June forecast. Projections for 2027 and 2028 moved higher. Inflation excluding energy and food is expected to average 2.5% this year, 2.6% in 2027 and 2.3% in 2028.
Energy costs lift the inflation outlook
ECB President Christine Lagarde said higher energy prices had raised the projected path for inflation. The bank expects headline inflation to remain well above its 2% target into the first half of 2027. Energy inflation is expected to ease afterward and turn negative during part of 2028. The ECB also expects higher energy costs to pass gradually into food and underlying prices. Most measures of longer-term inflation expectations remain close to 2%, according to its latest assessment.
The outlook for economic growth also strengthened compared with the previous forecast round. Staff now expect euro area gross domestic product to expand 0.9% in 2026. Growth is projected at 1.4% in 2027 and 1.5% in 2028. Forecasts for 2026 and 2027 increased from June. The central bank cited stronger economic resilience in its updated assessment. Euro area unemployment stood at 6.4% in July, while employment and labor force growth continued to slow.
Borrowing costs remain elevated across the euro area
Financing conditions continue to reflect earlier monetary tightening across households and businesses. Average bank lending rates for companies stood at 3.8% in June and July. That compared with 3.6% in May. The cost of market-based corporate debt reached 4.0% in July. Mortgage rates held at 3.5% in both June and July. 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 said future rate decisions will depend on incoming economic and financial data. It will assess the inflation outlook, underlying price trends and how monetary policy affects the economy. The council did not commit to a preset interest rate path. Asset purchase and pandemic emergency purchase portfolios continue to shrink as maturing securities are no longer reinvested. The European Central Bank said its policy remains focused on returning inflation sustainably to its 2% target over the medium term.