The European Central Bank (ECB) raised its three key interest rates by 25 basis points on Thursday, citing continued inflationary pressures from the conflict in the Middle East and warning that inflation was likely to remain above target for an extended period.

The ECB’s governing council said the decision reflected its commitment to ensuring that inflation stabilised at its 2 per cent medium-term target.

Under the latest ECB staff projections, headline inflation was expected to average 3.0 per cent in 2026, before easing to 2.5 per cent in 2027 and 2.1 per cent in 2028.

Inflation excluding energy and food was projected at 2.5 per cent in 2026, 2.6 per cent in 2027 and 2.3 per cent in 2028.

Compared with the ECB’s June projections, the forecast for headline inflation in 2026 was unchanged, while projections for both 2027 and 2028 were revised upwards.

The ECB also raised its economic growth forecasts, with the euro area economy expected to expand by 0.9 per cent in 2026, 1.4 per cent in 2027 and 1.5 per cent in 2028.

The projections for 2026 and 2027 represented upward revisions, mainly reflecting the greater than expected resilience of the euro area economy.

However, the central bank stressed that the economic outlook remained highly uncertain, with inflation risks tilted to the upside and economic growth risks to the downside.

The ECB said its updated scenarios relating to the energy shock illustrated a broad range of possible outcomes for growth and inflation, depending on the intensity and duration of the shock and its indirect and second-round effects.

The governing council said it remained well positioned to respond to the uncertainty created by the conflict.

It would continue to determine the appropriate monetary policy stance on a data-dependent and meeting-by-meeting basis, rather than committing to a particular path for interest rates.

Future decisions would take account of the inflation outlook and the risks surrounding it, alongside incoming economic and financial data, underlying inflation and the strength of monetary policy transmission.

The ECB said it was not pre-committing to a particular rate path.

Where do the key ECB rates stand now?

Following Thursday’s decision, the interest rate on the deposit facility was raised to 2.50 per cent, while the main refinancing operations rate increased to 2.65 per cent.The marginal lending facility rate was raised to 2.90 per cent.

The new rates will take effect from September 16, 2026, the ECB confirmed.

Meanwhile, the ECB’s asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios continued to decline at a measured and predictable pace.

This was because the Eurosystem was no longer reinvesting principal payments from securities as they matured.

The governing council also reiterated that it stood ready to adjust all instruments within its mandate to ensure that inflation stabilised at 2 per cent over the medium term.

It said it would also act to preserve the smooth functioning of monetary policy transmission across the euro area.

The ECB’s Transmission Protection Instrument remained available to address unwarranted and disorderly market dynamics that could pose a serious threat to the transmission of monetary policy across euro area countries.

The instrument was intended to allow the governing council to deliver more effectively on its price stability mandate.