ECB Raises Interest Rates: Conflict in the Middle East Pressures Inflation

The Governing Council of the European Central Bank (ECB) decided at today’s meeting to raise all three key interest rates by 25 basis points.

The main drivers of this decision are persistent inflationary pressures caused by the conflict in the Middle East and the expectation that inflation will remain significantly above the target level of two percent for an extended period.

According to the new decisions, which will take effect on September 16, 2026, the deposit facility rate will increase to 2.50 percent, the main refinancing operations rate to 2.65 percent, while the marginal lending facility rate will be 2.90 percent.

ECB experts also published the latest core macroeconomic projections, estimating the average total inflation rate at 3.0 percent in 2026, 2.5 percent in 2027, and 2.1 percent in 2028.

Compared to the June estimates, the total inflation projection for 2026 remained unchanged, but the rates for 2027 and 2028 were revised upwards.

At the same time, core inflation, which excludes energy and food prices, is projected at 2.5 percent in 2026, 2.6 percent in 2027, and 2.3 percent in 2028.

Unexpected Resilience

When it comes to economic growth, the projections for real GDP have been revised upwards to 0.9 percent for 2026 and 1.4 percent for 2027, while growth of 1.5 percent is expected for 2028. The better growth outlook in the short term is primarily a result of the unexpected resilience of the euro area economy.

However, the central bank warns that economic prospects remain under significant uncertainty, with risks to inflation being notably positive, while risks to economic growth are negative.

Particular emphasis is placed on the impact of a potential energy shock, with current scenarios showing a wide range of possible movements depending on the strength, duration, and secondary effects of that shock.

From Meeting to Meeting

Due to the high level of uncertainty, the Governing Council emphasizes that it does not commit in advance to a specific path for future interest rates. The implementation of monetary policy will continue to be guided by incoming data from meeting to meeting, with decisions depending on the assessment of inflation prospects, the dynamics of core inflation, and the strength of the transmission of monetary measures.

Regarding the balance sheet of the Eurosystem, the portfolios of the Asset Purchase Programme and the Pandemic Emergency Purchase Programme continue to be reduced at a moderate and predictable pace as the principal of maturing securities is no longer reinvested.

The ECB states that it remains ready to adjust all available instruments, including the Transmission Protection Instrument, to ensure price stability and prevent unwarranted disruptions in financial markets within the euro area.