The ECB Lifts Its Deposit Rate to 2.50 Percent and Sees Inflation Above Target Through 2028
The European Central Bank raised its 3 key interest rates by 25 basis points on Thursday, taking the deposit facility rate to 2.50 percent, the main refinancing rate to 2.65 percent and the marginal lending facility rate to 2.90 percent with effect from 16 September, and said inflation is set to remain well above its 2 percent target for an extended period. The decision, the second increase of this cycle after June’s, brings the reversal to a quarter of the 200 basis points the bank cut between June 2024 and June 2025, on our calculation from the bank’s own rate table, and puts the deposit rate back where it stood on 12 March 2025. New staff projections lifted the inflation path for 2027 to 2.5 percent from the 2.3 percent projected in June and for 2028 to 2.1 percent from 2.0, while raising growth for this year and next, and the Governing Council said it is not pre-committing to a particular rate path, per the bank’s statement.
A second step, and what it reverses
The decision follows the 25 basis point increase of 11 June, the bank’s first since September 2023, which ended 12 months of the deposit rate at 2.00 percent after 8 consecutive cuts had brought it down from 4.00 percent, on our count from the rate table. The 2 increases together restore 50 of the 200 basis points removed in that cycle, and the 15 basis point gap between the main refinancing rate and the deposit rate is unchanged, on our calculation, so the structure of the corridor has not moved, only its level. The Governing Council said the decision underscores its commitment to setting policy so that inflation stabilises at 2 percent in the medium term, and that it will follow a data dependent, meeting by meeting approach.
Measured against August inflation, the new 2.50 percent deposit rate stands 0.8 percentage points below the 3.3 percent headline rate and 0.1 percentage points above the 2.4 percent rate excluding energy and food, on our calculation, and it is equal to the staff’s 2.5 percent headline projection for 2027. On our reading of the components in President Christine Lagarde’s statement in Berlin, the rise from 2.9 percent in July came from energy, where inflation rose to 14.3 percent from 10.3 percent, an increase the statement attributed in particular to a strong contribution from refining margins on liquid fuels as well as higher energy commodity prices, while food inflation was unchanged at 1.2 percent and core inflation edged down to 2.4 percent from 2.5. The gap between headline and core inflation widened to 0.9 percentage points in August from 0.4 in July, on our calculation, which is consistent with an energy shock whose broader pass through remains limited so far, on our reading.
The projections move up on both inflation and growth
Against June, the staff baseline is unchanged for 2026 inflation at 3.0 percent and higher in both later years: 2.5 percent for 2027 against 2.3, and 2.1 percent for 2028 against 2.0. Inflation excluding energy and food is projected at 2.5 percent this year, 2.6 percent in 2027 and 2.3 percent in 2028, against 2.5, 2.5 and 2.2 in June, so the revision is 0.1 percentage points in each of the outer years, on our comparison of the 2 releases. Growth is revised up to 0.9 percent for 2026 from 0.8 and to 1.4 percent for 2027 from 1.2, with 2028 unchanged at 1.5 percent, which the bank attributes mainly to the greater than expected resilience of the euro area economy. The statement said the economy proved resilient in the second quarter despite the energy shock, with unemployment unchanged at 6.4 percent in July, and that headline inflation is likely to stay well above target into the first half of 2027 before energy inflation declines and turns negative up to mid 2028, returning headline inflation to around target towards the end of 2027.
The wage channel is the one the bank is watching and it is cooling: compensation per employee grew 3.3 percent in the second quarter, down from 3.5 percent in the first, while unit labour cost growth slowed to 2.6 percent from 3.5 percent, a gap that implies productivity growth of about 0.7 percent, on our calculation from the 2 figures. Growth in unit profits rose to 2.2 percent from 0.3 percent, and the bank’s wage tracker points to negotiated wage growth of 2.7 percent in the first half of 2027. The statement listed the risks to inflation as tilted to the upside, in particular from the conflict in the Middle East and the energy shock, with gas prices singled out in the event of further supply disruptions or a cold winter coinciding with low storage.
Transmission is already visible in lending rates
Bank lending rates for firms rose to 3.8 percent in June and July from 3.6 percent in May after the June increase, per the statement, and the cost of market based corporate debt stood at 4.0 percent in July, well above its level before the conflict. Lending to firms nonetheless grew 4.4 percent in the year to July, up from 4.0 percent in May and June, and mortgage rates were unchanged at 3.5 percent with mortgage lending growth at 3.0 percent.
| Rate | From 16 September | From 17 June | Before June |
|---|---|---|---|
| Marginal lending facility | 2.90% | 2.65% | 2.40% |
| Main refinancing operations | 2.65% | 2.40% | 2.15% |
| Deposit facility | 2.50% | 2.25% | 2.00% |
The 3 key ECB interest rates from the bank’s decisions of 10 September and 11 June 2026 and its key interest rates table, ranked by level; the “Before June” column is the level in force from 11 June 2025.
| ECB staff baseline, % | 2026 | 2027 | 2028 |
|---|---|---|---|
| Headline inflation | 3.0 (3.0) | 2.5 (2.3) | 2.1 (2.0) |
| Inflation excluding energy and food | 2.5 (2.5) | 2.6 (2.5) | 2.3 (2.2) |
| Real GDP growth | 0.9 (0.8) | 1.4 (1.2) | 1.5 (1.5) |
September 2026 ECB staff projections, annual averages, with the June 2026 Eurosystem staff projections in parentheses, from the bank’s decisions of 10 September and 11 June.
| Euro area inflation, annual | August | July |
|---|---|---|
| Energy | 14.3% | 10.3% |
| Headline | 3.3% | 2.9% |
| Services | 3.0% | 3.3% |
| Excluding energy and food | 2.4% | 2.5% |
| Food | 1.2% | 1.2% |
| Goods | 1.2% | 0.9% |
Euro area inflation rates as stated in the ECB’s monetary policy statement of 10 September 2026, ranked by the August rate.
Why it matters: The euro area’s central bank has now reversed a quarter of its easing cycle in 3 months and is doing so with a policy rate that remains below current headline inflation, which, on our reading, treats the shock as an energy event whose broader second round effects remain limited so far, to be leaned against gradually rather than headed off. The projections make the same point in numbers. Core inflation is projected to rise, not fall, next year, to 2.6 percent, and headline inflation is now above 2 percent in every year of the horizon, on our reading of the baseline, so the bank’s own forecast no longer contains a year at target. The growth revision cuts the other way: an economy revised up for both this year and next, to 0.9 percent and 1.4 percent, gives the Council more room to tighten than it had in June, and the 3.8 percent lending rate to firms shows the June move already passing through. What the Council did not do is guide: no path, no advance commitment, and a stated readiness to adjust all its instruments within its mandate, which leaves the next decision open to the data, on our reading.
Outlook: The next Governing Council monetary policy meeting decides with at least the September inflation print in hand, and the bank has endorsed no path beyond it. The inputs to watch are the ones the statement named: energy commodity prices and refining margins, gas storage into the winter, and the wage tracker’s 2.7 percent reading for the first half of 2027. On the bank’s own baseline, the deposit rate is equal to the staff’s 2.5 percent headline projection for 2027 before any further move, on our calculation, so each further 25 basis points lifts it above the inflation the bank expects next year rather than far above it. The Federal Reserve meets on 15 and 16 September and the Bank of Japan on 17 and 18 September, per our Week Ahead of 6 September, so the 3 major central banks decide within 8 days of each other.
Sources: European Central Bank, The Edge.
