ECB raises interest rates to 2.50% amid Middle East inflation pressures

The European Central Bank on Thursday raised its three key interest rates by 25 basis points, lifting the deposit facility rate to 2.50% as persistent inflation driven by the Middle East conflict continues to keep price growth well above target.ecb.europa

The decision, announced by the Governing Council following its September 9–10 meeting, brings the main refinancing rate to 2.65% and the marginal lending facility to 2.90%, effective September 16. It marks the second hike in what a Reuters poll of 65 economists described as the ECB's shortest hiking cycle in 15 years, with all respondents having predicted the move.reuters+2

Inflation Outlook and Staff Projections

New ECB staff projections see headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with the 2027 and 2028 figures revised upward compared to June. Core inflation, excluding energy and food, is projected at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. The baseline growth projection stands at 0.9% for 2026, 1.4% for 2027, and 1.5% for 2028 — an upward revision for both 2026 and 2027, reflecting "greater than expected resilience of the euro area economy," according to the ECB's statement.ecb.europa

The Governing Council emphasized it is "not pre-committing to a particular rate path" and will continue following a data-dependent, meeting-by-meeting approach. ECB President Christine Lagarde is scheduled to address the decision at a press conference at 14:45 CET.ecb.europa

Bond Market Pressures

The rate hike arrives amid a broader selloff in sovereign debt markets. Gregor Kapferer of Vontobel attributed the rise in yields to "a combination of the revaluation derived from inflation and monetary policy at the short end, and fiscal pressures, supply and global capital flows at the long end". Florian Späte of Generali Investments predicted the 10-year German bund will reach 3.25% within three months and warned that "yields will continue to be under upward pressure".rankiapro

France faces particular scrutiny. Späte cautioned that "fiscal deterioration and electoral risks leave French government bonds exposed to a widening of spreads". CaixaBank Research noted that sovereign yields across the euro area have returned to pre-2008 levels, with risk premiums now reflecting countries' macroeconomic fundamentals "even after the Middle East energy shock".caixabankresearch+1

What Comes Next

The Reuters poll suggested this hike may be the ECB's last for now. The ECB's asset purchase and pandemic emergency purchase portfolios continue to shrink as the Eurosystem no longer reinvests maturing securities, part of a broader balance sheet normalization that has brought ECB assets from a peak of 65% of euro area GDP in 2021 to around 37%. The Governing Council said it "stands ready to adjust all of its instruments" to ensure inflation returns to its 2% target.caixabankresearch+2