The European Central Bank raised interest rates by 25 basis points on Thursday, delivering its second increase of 2026 as higher energy costs linked to the war in the Middle East continue to push inflation above the central bank’s 2% target.
The decision lifted the ECB’s deposit facility rate to 2.50%. The move follows a 25-basis-point increase in June and a pause in July, as policymakers assess how the energy shock is feeding through to prices across the 21-member euro area.
“The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth,” the ECB said following its meeting.
Inflation Expected to Stay Above Target
Euro-area inflation moved above 3% during the summer as higher oil and natural-gas prices increased energy costs following the outbreak of the Middle East conflict.
The ECB maintained its forecast for headline inflation at 3.0% in 2026, but raised its projection for 2027 to 2.5% from 2.3% and for 2028 to 2.1% from 2.0%.
The revisions indicate that policymakers now expect the energy shock to dissipate more gradually than previously anticipated. Core inflation, which excludes energy and food, is projected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.
Energy prices have been the primary driver of the recent increase in headline inflation. However, broader price pressures have remained more contained, with wage growth slowing and underlying inflation showing signs of moderation.
Euro-Area Growth Forecasts Raised
Despite higher energy costs, the euro-area economy has performed better than previously expected.
The ECB raised its 2026 GDP growth forecast to 0.9% from 0.8% and increased its 2027 projection to 1.4% from 1.2%. The forecast for 2028 was maintained at 1.5%.
Consumption, investment and industrial production have remained relatively resilient, suggesting businesses and households have adapted to higher energy costs more effectively than initially anticipated.
The stronger growth outlook gives the ECB additional room to focus on inflation while monitoring the economic effects of higher borrowing and energy costs.
Energy Shock Reshapes Monetary Policy Outlook
The September increase marks the ECB’s second rate hike since the Middle East conflict began in late February. In June, policymakers raised rates by 25 basis points after concluding that higher energy prices posed a significant risk to the medium-term inflation outlook.
The ECB subsequently kept rates unchanged in July, saying it would continue to evaluate the intensity and duration of the energy shock and potential indirect effects on other prices.
The central bank has maintained a meeting-by-meeting approach and has not committed to a predetermined path for interest rates.
Attention now turns to ECB President Christine Lagarde’s press conference for additional details on the inflation outlook and the considerations that could shape future monetary-policy decisions.
