The European Central Bank raised its key interest rates by 25 basis points on September 10, its second increase this year. The deposit facility rate now stands at 2.5%, up from 2.25%.
The move confirms that the ECB has moved firmly into tightening mode after cutting rates through 2024 and 2025. Its first hike in three years came in June.
The new rates
- Deposit facility rate: 2.50%
- Main refinancing operations rate: 2.65%
- Marginal lending facility rate: 2.90%
Energy is driving inflation
Eurozone inflation rose to 3.3% in August from 2.9% in July, the highest reading since September 2023. Energy prices did most of the damage, with energy inflation jumping to 14.3% from 10.3%.
The spike follows the Iran war and fighting around the Strait of Hormuz, which disrupted crude supplies through one of the world’s most important shipping lanes. ECB research found that energy supply factors explained about 90% of the rise in energy inflation between January and May.
Underlying price pressure is calmer:
- Core inflation, which excludes energy and food, eased to 2.4% from 2.5%.
- Services inflation slowed to 3.0% from 3.3%.
Why hike if core inflation is easing?
The ECB’s main concern is second-round effects. If workers demand higher wages to cover energy bills and companies raise prices in response, a temporary shock can become persistent inflation. The bank warned that inflation is set to stay well above its 2% target for an extended period.
ECB staff now expect headline inflation to average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The 2027 and 2028 figures were revised up from June.
President Christine Lagarde has repeatedly said that “the burden of proof is on data”, signalling that future decisions will be made meeting by meeting.
Who feels the impact
- Homeowners: Variable-rate mortgages in countries such as Spain and Italy will reprice higher.
- Governments: Higher yields raise borrowing costs for heavily indebted states.
- Savers: Deposit rates should continue to edge up.
- Businesses: Firms already hit by energy bills now face costlier credit as well.
What to watch
The ECB meets again on October 29 and December 17. Oil prices, wage settlements and the euro exchange rate will decide whether a third hike follows.
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