Higher inflation prompts a second increase this year despite resilient euro-area growth The European Central Bank has raised its key interest rates by a qu…
Higher inflation prompts a second increase this year despite resilient euro-area growth
The European Central Bank has raised its key interest rates by a quarter percentage point, responding to an energy-driven resurgence in inflation that is placing renewed pressure on household budgets across the euro area. The decision takes the deposit facility rate to 2.50% and signals that policymakers are prepared to accept higher borrowing costs while inflation remains persistently above the ECB’s 2% target.
Rates rise after July pause
The ECB’s Governing Council, meeting in Berlin on Thursday, increased all three official rates by 25 basis points. The deposit facility will rise to 2.50%, the main refinancing rate to 2.65% and the marginal lending facility to 2.90% from 16 September.
The move is the bank’s second increase of 2026. It follows a June rise and a pause in July, when policymakers sought more evidence about the duration and wider economic effects of the energy-price shock.
In its September monetary policy decision, the ECB said conflict in the Middle East was continuing to generate inflationary pressure. It expects price growth to remain well above target for an extended period but declined to commit itself to another increase.
Future decisions will remain dependent on economic data, the inflation outlook and evidence about how monetary policy is passing through to businesses and households.
Energy costs drive inflation higher
Euro-area annual inflation rose to an estimated 3.3% in August, from 2.9% in July. The increase was heavily concentrated in energy, where annual price growth accelerated to 14.3%.
The latest Eurostat flash estimate showed a more restrained picture elsewhere. Services inflation eased to 3.0%, while food, alcohol and tobacco prices increased by 1.2%. Inflation excluding energy and food edged down to 2.4%, according to the ECB.
That distinction matters. Interest rates cannot produce more oil or gas, reopen a disrupted shipping route or end a conflict. The central bank’s concern is that a prolonged energy shock could spread into transport, production, retail prices, wage negotiations and inflation expectations.
The longer businesses expect their costs to remain elevated, the greater the risk that temporary increases become embedded across the economy. Higher rates seek to contain that process by moderating demand and signalling that the ECB will defend its price-stability mandate.
Inflation forecast raised beyond this year
The ECB expects headline inflation to average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. Its 2026 estimate is unchanged from June, but the projections for the following two years have been raised.
Underlying inflation is also forecast to remain persistent. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027 and 2.3% in 2028.
At the same time, the bank has upgraded its growth expectations. It now forecasts euro-area economic expansion of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. The revisions for this year and next reflect stronger-than-expected private consumption, public expenditure and business activity.
That resilience gave policymakers more room to raise rates. Yet it does not remove the risk of weaker growth if energy supplies deteriorate, geopolitical tensions intensify or credit conditions tighten more sharply than anticipated.
Unequal effects on households and firms
The consequences will vary considerably across the euro area. Borrowers with long-term fixed-rate mortgages may see little immediate change, while households seeking a new loan or refinancing an existing one are more exposed. Variable-rate borrowers could face faster increases, depending on national lending structures and the terms of their contracts.
Smaller companies that depend on bank finance may also encounter higher borrowing costs. Businesses operating with narrow margins face pressure from both sides: more expensive energy and more costly credit. Larger companies with access to bond markets or substantial cash reserves generally have more options.
The decision therefore deepens the policy dilemma described earlier in The European Times’ coverage of Europe’s renewed inflation squeeze. Measures intended to control future price growth can impose immediate costs on indebted households, tenants whose landlords face refinancing pressures and enterprises considering new investment.
Governments can soften the social impact, but the ECB has urged them to keep energy assistance temporary and targeted. Broad subsidies may be expensive, disproportionately benefit high-consuming households and sustain demand when monetary policy is attempting to restrain it.
No predetermined path
The ECB’s language suggests vigilance rather than a declared cycle of repeated increases. Much will depend on whether energy inflation begins to retreat, whether higher costs spread into wages and non-energy prices, and whether the economy continues to withstand tighter financing conditions.
For households, the immediate picture is uncomfortable: essential energy costs are rising while credit is becoming more expensive. For policymakers, the central question is whether acting now prevents a longer and more damaging inflation problem, or places an excessive burden on an economy facing shocks that interest rates cannot directly resolve.
The bank’s next decisions will reveal how it balances those risks. Its September move makes one priority clear: stronger growth forecasts have not displaced price stability at the centre of euro-area monetary policy.
