The Governing Council of the European Central Bank (ECB) moved today to increase its three key interest rates by 25 basis points, highlighting that the Middle East conflict continues to exert upward pressure on inflation, which is expected to remain above target for a prolonged period. With today's decision, the ECB underscores its commitment to executing monetary policy aimed at stabilizing inflation at the 2% medium-term target.
New projections for inflation and growth
According to the baseline scenario of the ECB's new staff projections, headline inflation is expected to average 3% in 2026, 2.5% in 2027, and 2.1% in 2028. For inflation excluding energy and food, the baseline scenario projects rates of 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. Compared to the June projections, the inflation estimate for 2026 remains unchanged, while it has been revised upward for 2027 and 2028. At the same time, the ECB forecasts an economic growth rate of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Growth projections have been revised upward for both 2026 and 2027, a development reflecting primarily the higher-than-expected resilience of the eurozone economy.
High uncertainty and upside risks for inflation
The ECB points out that the outlook continues to be characterized by high uncertainty, with risks remaining tilted to the upside for inflation and to the downside for economic growth. Specific reference is made to energy disruption. The updated scenarios of the ECB staff capture the wide spectrum of possible developments for growth and inflation, depending on the intensity and duration of the shock, as well as its indirect and second-round effects. With today's decision, the Governing Council retains the flexibility to address the uncertainty created by the conflict. The ECB will continue to follow a data-dependent approach, making decisions meeting-by-meeting to determine the appropriate stance of monetary policy. Rate decisions will be based on its assessment of the inflation outlook and surrounding risks, in light of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The Governing Council, as the ECB emphasizes, does not pre-commit to a specific rate path.
The new key interest rates
Following the 25 basis points increase, the three key ECB interest rates are set as follows: The deposit facility rate increases to 2.50%. The main refinancing operations rate increases to 2.65%. The marginal lending facility rate increases to 2.90%. The new interest rate levels will take effect from September 16, 2026.
Status of APP and PEPP
Regarding asset purchase programs, the APP and PEPP portfolios continue to decline at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.
The ECB keeps all tools available
The Governing Council stands ready to adjust all available instruments within its mandate to ensure that inflation stabilizes at its 2% target over the medium term. Concurrently, the goal remains to safeguard the smooth functioning of the monetary policy transmission mechanism. In this context, the Transmission Protection Instrument (TPI) remains available to counteract unwarranted, disorderly market dynamics that pose a serious threat to the transmission of policy across all euro area countries. By doing so, the Governing Council seeks to preserve the effectiveness of its policy and fulfill its mandate of ensuring price stability.
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