The European Central Bank's Governing Council raised the three key ECB interest rates by 25 basis points on Thursday, 10 September, lifting the deposit facility rate to 2.50%, the main refinancing operations rate to 2.65% and the marginal lending facility rate to 2.90%, with effect from 16 September. The decision marked the second increase in three months and followed a pause at the July session. In its statement, the central bank said the conflict in the Middle East continues to generate inflation pressures and that inflation is set to remain well above target for an extended period. The Governing Council described the move as underscoring its commitment to setting policy to ensure inflation stabilises at the 2% target in the medium term. The meeting was held in Berlin rather than at the bank's Frankfurt headquarters.
The tightening responds to an energy-driven reacceleration in euro area prices. Preliminary Eurostat data showed inflation across the 21-country bloc rose to 3.3% in August from 2.9% in July, the highest reading in three years, with energy inflation spiking to 14.3%. Core inflation, which excludes energy and food, eased to 2.4% in August from 2.5%, indicating that underlying pressures are not the source of the overshoot. The September move follows the June decision that ended three years without an increase, itself preceded by eight cuts that had taken the deposit rate down from a peak of 4.00% to 2.00%.
FORECASTS REVISED UPWARD ON BOTH INFLATION AND GROWTH
New ECB staff projections put headline inflation at an average of 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The 2026 figure was unchanged from June, while the outer two years were revised up from 2.3% and 2.0% respectively. For inflation excluding energy and food, staff now see 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028, against June projections of 2.5%, 2.5% and 2.2%. The upward revision to the 2027 core figure points to a longer path back to target than the bank assumed three months ago.
Growth projections were also lifted, to 0.9% for 2026, 1.4% for 2027 and 1.5% for 2028, an upward revision for the first two years. The ECB attributed the change mainly to the greater than expected resilience of the euro area economy. The Governing Council said the outlook remains highly uncertain, with risks to the upside for inflation and to the downside for growth, and noted that staff had updated its scenario analysis to illustrate a broad range of outcomes depending on the intensity and duration of the energy shock and its indirect and second-round effects.
MARKETS PRICE FURTHER TIGHTENING DESPITE NEUTRAL-RATE CEILING
At 2.50%, the deposit rate sits at what economists identify as the upper limit of a neutral range estimated between 1.75% and 2.50%, meaning any further increase would move policy into restrictive territory. The ECB's chief economist has previously pointed to 2.50% as the upper bound of that neutral estimate. At the press conference following the announcement, Lagarde said the neutral rate band would not inform monetary policy decisions. The Governing Council reiterated that it will follow a data-dependent, meeting-by-meeting approach and is not pre-committing to a particular rate path.
Market reaction was contained. European equities dipped slightly after the statement, the euro strengthened against the dollar, and German and French 10-year government bond yields moved higher. Brent crude rose above $102 per barrel earlier in the session on concern over further supply disruption around the Strait of Hormuz, while European TTF gas exceeded €80 per megawatt-hour. Market pricing implies a 75.1% probability of a further increase at the 29 October meeting and 73.3% for 17 December, although economists polled by Reuters had expected the ECB to conclude its tightening after September. The Federal Reserve meets on 16 September, the Bank of England on 17 September and the Bank of Japan on 18 September.