The European Central Bank has raised interest rates by 25 basis points, taking its key deposit rate to 2.50% as policymakers respond to renewed inflationary pressure from the conflict in the Middle East.
The ECB's Governing Council announced on Thursday that all three of its key interest rates would increase. The deposit facility rate will rise from 2.25% to 2.50%, the main refinancing rate from 2.40% to 2.65%, and the marginal lending facility from 2.65% to 2.90%, with the changes taking effect from 16 September.
It is the ECB's second rate increase this year following a 25-basis-point rise in June and a decision to leave rates unchanged in July. The central bank said the latest increase reflected continuing inflationary pressure from the Middle East conflict, with inflation now expected to remain above its 2% target for an extended period.
The decision had been widely anticipated. Market pricing around the ECB's July meeting had already pointed towards another increase in September as policymakers assessed the impact of higher energy prices on the euro-area economy.
Alongside the rate decision, new ECB staff projections put headline inflation at an average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028.
The 2026 forecast is unchanged from June, but projections for both 2027 and 2028 have been revised higher. Inflation excluding energy and food — an important measure of underlying price pressure — is projected at 2.5% this year, 2.6% in 2027 and 2.3% in 2028.
That suggests the ECB does not expect inflation to return to its 2% target quickly, despite the tighter monetary conditions now being imposed across the euro area.
The economic outlook has proved somewhat stronger than previously expected. ECB staff now forecast euro-area growth of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028, with the forecasts for this year and next revised upwards because the economy has been more resilient than anticipated.
That resilience gives policymakers somewhat more room to tighten monetary policy in response to inflation, although the ECB continues to warn that the risks run in opposite directions: inflation could surprise on the upside while economic growth remains vulnerable to the downside.
The latest increase follows months of concern about the inflationary consequences of the Middle East conflict.
When the ECB raised rates by 25 basis points in June, the deposit facility rate increased to 2.25%, the main refinancing rate to 2.40% and the marginal lending rate to 2.65%. The Governing Council then held all three rates in July as it waited for more evidence about how higher energy costs were feeding through to the wider economy.
At that July meeting, the ECB said the full inflationary impact of the energy shock had yet to emerge and that it was monitoring not only the direct effect of higher energy prices but also indirect and second-round effects.
Thursday's increase suggests the balance has shifted sufficiently for policymakers to tighten again.
The ECB's latest projections nevertheless underline how uncertain the consequences remain. Staff have examined different scenarios for the intensity and duration of the energy shock, including the extent to which higher costs spread beyond energy into other prices and wages.
That transmission is particularly important for monetary policy. A temporary increase in energy prices does not necessarily require the same response as a broader and more persistent rise in underlying inflation.
The immediate effect is a further tightening of financing conditions across the euro area.
The deposit facility rate is particularly important because it influences short-term money-market rates and, through them, borrowing and savings costs across the banking system. Higher ECB rates can eventually feed into the interest rates charged on mortgages, business loans and other forms of credit, although the extent and timing varies between countries, lenders and products.
The trade-off for policymakers is becoming increasingly difficult. Higher rates can help reduce inflationary pressure by restraining demand, but they also increase borrowing costs for households and companies and can weigh on investment and economic growth.
The ECB's improved growth projections provide some reassurance on that front, but the central bank has explicitly warned that the outlook remains highly uncertain.
Thursday's decision does not amount to a commitment to further increases.
The Governing Council reiterated that it will make decisions on a meeting-by-meeting basis, assessing incoming economic and financial data, the inflation outlook, underlying price pressures and the extent to which previous monetary-policy changes are feeding through to the economy.
It also repeated that it is not pre-committing to a particular path for interest rates.
That makes the next stage of the ECB's communication particularly important. President Christine Lagarde's press conference in Berlin will be closely watched for indications of how concerned policymakers are about persistent inflation and whether another increase could be considered at the Governing Council's next monetary-policy meeting.
For markets, the question has therefore moved on from whether the ECB would raise rates in September. The focus is now on whether 2.50% marks the peak of the renewed tightening cycle — or another step towards still higher borrowing costs.
