ECB raises three key interest rates by 25 basis points

The European Central Bank this week raised three key interest rates by 25 basis points, as it seeks to ensure that inflation stabilises at its 2% target in the medium term.

The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be increased to 2.25%, 2.40% and 2.65% respectively, with effect from 17 June 2026.

The ECB’s Governing Council said that the war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.

In the baseline of the new Eurosystem staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. For inflation excluding energy and food, the baseline foresees an average of 2.5% in 2026 and 2027 and 2.2% in 2028.

Compared with March, the ECB revised its baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation. The baseline sees economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.

The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth. The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects.

The Governing Council said it remains well positioned to navigate the uncertainty caused by the war. It will closely monitor the situation and follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.