The European Central Bank raised its three key interest rates by 25 basis points on Thursday, as the energy shock caused by the ongoing Middle East war pushes inflation in the euro area above its 2% medium-term target.
As widely expected, the central bank will increase the deposit facility rate to 2.50%, while the interest rates on main refinancing operations and the marginal lending facility will rise to 2.65% and 2.90%, respectively, effective Sept. 16. The decision marks the ECB's second interest rate hike in 2026.
"The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period," the ECB's Governing Council said, reiterating its commitment to ensure that the inflation rate stabilizes at its 2% target. "The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth. In relation to the energy shock, the updated scenarios put together by staff illustrate the broad range of outcomes for how growth and inflation would evolve under different assumptions about its intensity and duration, as well as its indirect and second-round effects."
Baseline inflation projections for 2027 and 2028 were also updated, with ECB staff forecasting average headline inflation of 2.5% and 2.1%, respectively. Meanwhile, the average core inflation estimates were 2.6% in 2027 and 2.3% in 2028. Headline and core inflation forecasts for 2026 remain unchanged at 3% and 2.5%.
In June, ECB staff's average headline inflation expectations stood at 2.3% in 2027 and 2% in 2028, while average core inflation forecasts for the two years were projected to be 2.5% and 2.2%.
"They might not like the term, but the just-announced second rate hike, bringing the ECB's deposit rate to 2.5%, still falls into the category of an 'insurance' rate hike. Or to put it in terms the Bank might prefer, it is a hike to stay ahead of the curve, demonstrating the ECB's high level of vigilance, and an attempt to prevent higher energy prices from feeding through to the broader economy," ING said in a quick take note. "While the stage was set for a rate hike, even under a more benign energy price outlook, the recent escalation in the Middle East and surge in oil prices have clearly strengthened the case for an increase."
