ECB raises key interest rates by 25 basis points amid war pressures

The European Central Bank raised its three key interest rates by 25 basis points, citing inflation pressures generated by the war in the Middle East. The deposit facility rate increased to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility rate to 2.65%, effective June 17, 2026.

The ECB's Governing Council stated the rate increase remains robust across various scenarios mapping how the conflict might evolve and affect the euro area's medium-term outlook. The central bank maintains its commitment to ensuring inflation stabilizes at its 2% target.

New Eurosystem staff projections forecast headline inflation averaging 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Core inflation, excluding energy and food, is projected at 2.5% in both 2026 and 2027, then 2.2% in 2028. These figures represent upward revisions from March projections due to higher expected energy prices.

Economic growth projections show averages of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. The 2026 and 2027 forecasts were revised downward, reflecting the war's impact on commodity markets, real incomes, and confidence.

The ECB acknowledged significant uncertainty in the outlook, with upside risks for inflation and downside risks for economic growth. The central bank stated the war's full implications for medium-term inflation and growth depend on the energy price shock's intensity and duration, plus indirect and second-round effects.

The Governing Council indicated it will maintain a data-dependent, meeting-by-meeting approach to monetary policy decisions without pre-committing to a specific rate path. The central bank continues reducing its asset purchase programme and pandemic emergency purchase programme portfolios by not reinvesting principal payments from maturing securities.

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