ECB raises key rates 25 basis points to 2.50% amid Middle East energy shock

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%, showing that the rise in inflation was being driven by energy. The September move follows the June decision that ended almost 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%.

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 the upper limit of the ECB staff's estimated neutral range of 1.75% to 2.50%, meaning any further increase would move policy into restrictive territory. At the press conference following the announcement, Lagarde said the Governing Council was not attaching great importance to the neutral rate in the current circumstances. 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.

European shares closed at two-month lows, the euro edged lower against the dollar before recovering, 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 gas prices reached their highest level in more than three years. Markets priced further increases in the coming months, 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.