The European Central Bank (ECB) increased its key interest rates for the first time since September 2023 on Thursday following its Governing Council meeting in Frankfurt. The deposit facility rate, the main refinancing operations rate, and the marginal lending facility rate were all raised by 25 basis points, bringing them to 2.25 percent, 2.40 percent, and 2.65 percent, respectively.
The ECB Council stated that it remains “firmly determined to orient its monetary policy so that inflation stabilizes at the target value of two percent over the medium term.” The bank attributed the rate hike to inflationary pressure stemming from the war in the Middle East. Furthermore, the decision was deemed “robust against a range of scenarios illustrating how the shock might develop and affect the medium-term outlook for the Euro area,” the central bank explained.
Despite this action, the future outlook remains marked by uncertainty, with both upward risks to inflation and downward risks to economic growth. The ECB noted that the overall impact of the war on medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the extent of its indirect and second-round effects. This uncertainty is reflected in the wide range of inflation and growth outcomes within the updated illustrative scenarios compiled by Eurosystem experts.
Regarding projections, Eurosystem specialists expect the average headline inflation to be 3.0 percent in 2026, 2.3 percent in 2027, and 2.0 percent in 2028 based on the baseline scenario. Excluding energy and food prices, the average inflation is forecast to be 2.5 percent in 2026 and 2027, stabilizing at 2.2 percent in 2028.
These forecasts represent an upward revision of the baseline inflation projections for 2026 and 2027 compared to March. This revision is due to a higher path for energy prices, which is expected, to some extent, to translate into higher costs for food, goods, and services.
For economic growth in the baseline scenario, the experts forecast an average of 0.8 percent for 2026, accelerating to 1.2 percent in 2027 and 1.5 percent in 2028. However, these figures represent a downward revision for both 2026 and 2027, reflecting the stronger impact of the war on raw material markets, real incomes, and consumer confidence.
The central bank concluded that it is well-positioned to manage the uncertainty caused by the war. The ECB Council plans to closely monitor the situation, employing a data-driven approach and making decisions on a meeting-by-meeting basis to determine the appropriate monetary policy stance. Therefore, interest rate decisions will be based on its assessment of inflation prospects, associated risks, current economic and financial data, and the dynamics of underlying inflation and the strength of monetary transmission, rather than pre-determining a specific interest rate path.
