**ECB Raises Interest Rates Amid Middle East Conflict and Inflation Concerns**
The European Central Bank (ECB) announced on Thursday that it has raised its three key interest rates by 25 basis points, a move driven by ongoing inflationary pressures attributed to the conflict in the Middle East. The governing council of the ECB emphasized that this decision underscores its commitment to achieving a stable inflation rate of 2 percent in the medium term.
In its latest projections, the ECB anticipates that headline inflation will average 3.0 percent in 2026, before gradually decreasing to 2.5 percent in 2027 and 2.1 percent in 2028. Notably, the forecast for inflation excluding energy and food is projected at 2.5 percent in 2026, 2.6 percent in 2027, and 2.3 percent in 2028. These figures indicate a slight upward revision for the years 2027 and 2028 when compared to previous forecasts made in June, while the projection for 2026 remains unchanged.
In addition to inflation forecasts, the ECB has also revised its economic growth outlook for the euro area. The economy is now expected to grow by 0.9 percent in 2026, followed by 1.4 percent in 2027 and 1.5 percent in 2028. These upward revisions reflect a stronger-than-expected resilience in the euro area economy. However, the ECB cautioned that the overall economic outlook remains uncertain, with inflation risks skewed to the upside and growth risks leaning towards the downside.
The governing council highlighted that the recent energy shock has resulted in a wide range of potential outcomes for both growth and inflation, depending on the severity and duration of the shock, as well as its indirect and secondary effects. In light of this uncertainty, the ECB stated that it is prepared to respond flexibly to changing economic conditions.
Future monetary policy decisions will be made on a data-dependent basis, with the ECB not committing to a specific trajectory for interest rates. The council will consider the inflation outlook, associated risks, and incoming economic and financial data when determining its policy stance.
Following the recent decision, the interest rate on the deposit facility has been raised to 2.50 percent, while the main refinancing operations rate has increased to 2.65 percent. The marginal lending facility rate is now set at 2.90 percent. These new rates are set to take effect from September 16, 2026.
In conjunction with these rate changes, the ECB's asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios will continue to decline at a steady and predictable pace. This decline is due to the Eurosystem's decision to stop reinvesting principal payments from maturing securities.
The ECB reiterated its readiness to adjust all instruments within its mandate to ensure that inflation stabilizes at the targeted 2 percent over the medium term. Additionally, the central bank is committed to maintaining the smooth functioning of monetary policy transmission across the euro area. The ECB's Transmission Protection Instrument remains available to address any unwarranted market dynamics that could threaten the effective transmission of monetary policy across member countries.
As the situation in the Middle East continues to evolve, the ECB remains vigilant and adaptable, ready to respond to the challenges posed by inflation and economic uncertainty. The governing council's focus on data-driven decision-making reflects its commitment to navigating the complexities of the current economic landscape while striving to meet its inflation targets.