The ECB’s Governing Council on September 10 decided to raise all three key interest rates by 25 basis points. The deposit facility rate, the main refinancing operations rate, and the marginal lending facility rate will be increased to 2.50%, 2.65%, and 2.90%, respectively, effective September 16. The official explanation is that the ongoing conflict in the Middle East continues to put upward pressure on inflation, and inflation is expected to remain above the 2% medium-term target for a longer period. The decision signals a renewed policy focus on curbing price pressures, but the ECB also emphasized that it will not pre-commit to a future interest-rate path and will continue to make decisions at each meeting based on the data.
The new staff forecasts put overall inflation at 3.0% for 2026, 2.5% for 2027, and 2.1% for 2028; inflation excluding energy and food is projected at 2.5%, 2.6%, and 2.3%, respectively. The growth forecasts are 0.9% for 2026, 1.4% for 2027, and 1.5% for 2028. These numbers reflect the hardest policy mix to manage: inflation takes longer to return to target, while growth is not strong. Rate hikes can lower demand and inflation expectations, but they cannot directly increase energy supply. If policy tightens too quickly, financing costs will hit first corporate investment, real estate, and highly indebted member states.
The signal from this rate hike is more important than the 25 basis points themselves.
25 basis points is a common step size; what truly changes market judgment is the ECB’s acknowledgement that the inflation path has shifted up again. Overall inflation is heavily influenced by the energy shock, while core inflation forecasts are actually higher in 2027 than in 2026—suggesting policymakers worry that the pressure will linger through wages, services, and firms’ pricing. As long as medium-term inflation expectations could become unanchored, the central bank will tend to act early, because waiting until all data confirm the outlook often means having to pay higher interest rates and greater economic costs.
However, the ECB has not turned a single rate hike into a commitment to a continuous hiking cycle. The official framework still relies on three assessments: the inflation outlook and its risks, underlying inflation dynamics, and the strength of monetary policy transmission. Energy prices could reverse quickly, wage negotiations and services inflation also tend to lag, and bank credit responses to interest rates differ across countries. As a result, the next meeting could mean further tightening, but it could also mean waiting for more evidence to emerge. Extending this decision directly into fixed numbers and a specific terminal rate goes beyond what the announcement provides.
The balance-sheet policy also remains contractionary. The combination of the asset purchase programme and the pandemic emergency purchase programme continues to decline, as maturing principal is no longer reinvested. This means that even if policy rates are adjusted only slightly, central bank demand in the market is falling, and the prices of long-term bonds are increasingly determined by private investors. For member states with tighter fiscal space, financing conditions depend not only on deposit rates, but also on sovereign bond term premia and market views on debt sustainability.
Euro-area firms will feel two opposing forces. Energy and import costs raise operating pressures, while rate hikes also lift loan and bond financing costs. Companies with strong cash positions and pricing power can likely absorb the impact, whereas smaller and mid-sized firms relying on floating-rate loans and capital-intensive sectors are more vulnerable. On the banking side, the net interest margin from deposits and lending may benefit in the short term, but it could be eroded if the economy weakens, reducing loan demand and increasing default rates. For households, differences in mortgage structures will make a significant difference: borrowers on floating rates, or those whose rates are reset soon, will feel the pressure sooner, while fixed-rate holders transmit it more slowly.
To observe what comes next, it is necessary to put the three lines—energy, wages, and credit—together.
The first is energy. Conflicts in the Middle East affect oil and gas supply, shipping, and insurance costs, which can raise household bills directly, and also transmit through chemicals, transport, and manufacturing. The central bank cannot produce energy; it can only prevent a one-off shock from turning into broad-based price increases and wage catch-up. If energy prices fall back, inflation forecasts could be revised downward again; if the shock persists, the ECB will focus more on whether long-term expectations are rising.
The second is wages and services. Goods prices tend to reflect global supply and demand fairly quickly, while service prices are influenced more by local wages and demand. Even if energy falls back, wage compensation and service price increases may keep core inflation sticky. Later wage-bargaining agreements, unit labor costs, and services-sector surveys will be better indicators of internal pressure than a single month’s overall inflation. At the same time, improving real incomes support consumption, preventing policy from simply relying on demand cooling naturally.
The third is credit transmission. Rate hikes affect inflation only insofar as they change economic behavior through loans, bonds, the exchange rate, and expectations. If banks tighten lending standards quickly, the economy could cool faster than models expect; if firms have ample cash or fiscal support to keep the floor under them, policy transmission could be slower. The ECB therefore must observe conditions across different countries, sectors, and borrowers, rather than looking only at an average lending rate.
For market participants, the safest conclusion is not to bet on a particular rate endpoint, but to acknowledge that the policy distribution has widened. The ECB has already signalled through its actions that it believes current inflation risks warrant tighter constraints; at the same time, the 0.9% annual growth forecast serves as a reminder that the cost of continued rate hikes is also building. Every subsequent inflation, wage, credit, and growth data point will shift the weights at both ends. The path implied by the September decision is already in effect, but the pace thereafter remains an open question.