ECB's higher interest rates take effect

The European Central Bank's (ECB) latest interest rate increase, decided at its September 10 meeting in Frankfurt, has now come into force. The deposit facility rate rose to 2.5%, the main refinancing operations rate to 2.65%, and the marginal lending facility rate to 2.9%. This marks the second increase this year, following a similar 0.25 percentage point hike in June.

Middle East conflict cited as driver

The ECB's Governing Council said the ongoing conflict in the Middle East continues to fuel inflationary pressure, meaning inflation is expected to remain notably above target for a longer period. The Council stressed its commitment to a monetary policy course that stabilizes inflation at its 2% medium-term target.

Updated forecasts

According to the ECB staff's new baseline projections, average headline eurozone inflation is expected to reach 3% in 2026, easing to 2.5% in 2027 and 2.1% in 2028. Core inflation (excluding energy and food) is projected at 2.5% for 2026, while the 2027 and 2028 estimates have been revised upward compared to June.

Economic growth is forecast at 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The ECB attributed the upward revisions in growth mainly to greater-than-expected resilience in the eurozone economy.

Uncertainty remains high

The Council acknowledged the outlook remains highly uncertain, with inflation risks tilted to the upside and growth risks tilted to the downside. Future interest rate decisions will continue to be made meeting by meeting, based on incoming economic and financial data, without committing in advance to any particular rate path.

According to Eurostat data, annual eurozone inflation rose to 3.3% in August, up from 2.9% in July.