The European Central Bank has raised its three key interest rates by 25 basis points, its second increase this year, as the war between the United States and Iran keeps energy prices high across the eurozone.
The Governing Council took the decision in Berlin on September 10, away from its usual base in Frankfurt. From September 16 the deposit facility rate would rise to 2.5 per cent, the main refinancing rate to 2.65 per cent and the marginal lending rate to 2.9 per cent.
The move had been widely priced in by markets. It followed the ECB’s first rate rise since 2023 in June and a pause in July.
In its statement the bank said the conflict in the Middle East continued to generate inflation pressures. It added that inflation was “set to remain well above target for an extended period”.
Annual inflation in the 21 European Union member states that share the euro rose to 3.3 per cent in August from 2.9 per cent in July, according to a flash estimate from Eurostat. Energy prices climbed 14.3 per cent year on year, while core inflation, which strips out energy, food, alcohol and tobacco, eased to 2.4 per cent from 2.5 per cent.
Brent crude, the global oil benchmark, traded above $100 (€86) a barrel on September 10 as fighting between Washington and Tehran intensified.
New staff projections left the forecast for headline inflation this year at 3 per cent. Compared with June, the bank raised its estimate for 2027 to 2.5 per cent from 2.3 per cent and for 2028 to 2.1 per cent from 2 per cent.
Staff expected core inflation to average 2.5 per cent in 2026, 2.6 per cent in 2027 and 2.3 per cent in 2028.
The growth outlook improved. The ECB forecast expansion of 0.9 per cent in 2026, up from 0.8 per cent in June, and 1.4 per cent in 2027, with 1.5 per cent pencilled in for 2028.
The bank put the upgrade down mainly to the greater-than-expected resilience of the eurozone economy. It warned that risks to inflation were tilted to the upside and those to growth to the downside, with staff scenarios showing a wide range of outcomes depending on the intensity and duration of the energy shock.
ECB President Christine Lagarde told reporters in Berlin that the rate rise held up under each of the three scenarios. The decision was “robust on all three accounts”, she said.
The Governing Council said it would continue to decide meeting by meeting on the basis of incoming data, without committing in advance to any particular path for rates.
Investors appeared to expect more. Germany’s two-year bond yield rose by as much as 12 basis points to 3.19 per cent, its highest in almost three years, according to Bloomberg, as traders priced in further increases.
Executive board member Isabel Schnabel had argued on August 26 that the ECB would need to tighten further to bring inflation back to its 2 per cent target.
