European Central Bank Raises Interest Rates by Twenty-Five Basis Points
In line with inflationary risks stemming from conflicts in the Middle East, the European Central Bank increased interest rates and updated its projections.
The European Central Bank raised its policy rates by 25 basis points due to the risk that the inflation shock caused by the Iran war could become persistent, and revised its inflation forecasts for coming years upward.
Details of the Interest Rate Increase
The European Central Bank implemented a 25-basis-point increase in interest rates due to the risk that the inflation shock triggered by the Iran war might become persistent.
In line with this decision, the deposit facility rate was raised to 2.50 percent, the main refinancing operations rate to 2.65 percent, and the marginal lending facility rate to 2.90 percent.
Expectations and the Middle East Impact
The median expectation of economists participating in the Bloomberg survey was also for twenty-five basis point increases in rates.
In the ECB meeting statement, it was emphasized that the conflict in the Middle East continues to create inflationary pressures and that inflation is expected to remain above target for an extended period.
Revisions in Inflation Forecasts
While keeping its 2026 inflation forecast at 3 percent, the bank raised its 2027 forecast from 2.3 percent to 2.5 percent and its 2028 forecast from 2 percent to 2.1 percent.
The core inflation forecast remained at 2.5 percent for 2026, while the 2027 forecast was raised to 2.6 percent and the 2028 forecast to 2.3 percent.
Growth Expectations and Euro Area Data
The bank's growth forecast for 2026 was raised from 0.8 percent to 0.9 percent, and the 2027 forecast from 1.2 percent to 1.4 percent.
Headline inflation in the Euro Area has remained above the bank's 2 percent target for six months, reaching 3.3 percent in August, its highest level in nearly three years.
Market Expectations and Christine Lagarde's Statements
Market participants anticipate further steps from the ECB, with two more rate hikes priced in until mid-2027.
Speaking at the post-decision press conference, ECB President Christine Lagarde stated that they are determined to adjust monetary policy in a way that brings inflation back to the 2 percent target.