The European Central Bank raised its three key interest rates by 25 basis points on 10 September 2026, saying the Middle East conflict is continuing to generate inflation pressures and that inflation is expected to remain well above its 2% target for an extended period. In a monetary policy statement delivered in Berlin by President Christine Lagarde and Vice-President Boris Vujčić, the Governing Council said the decision underscores its commitment to stabilising inflation at 2% in the medium term.
New staff projections show headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. Inflation excluding energy and food is seen at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. The 2026 inflation forecast is unchanged from June, while 2027 and 2028 were revised upward. Growth is projected at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028, with upward revisions for 2026 and 2027 reflecting greater-than-expected resilience in the euro area economy. The ECB said risks remain skewed to the upside for inflation and to the downside for growth. Updated staff scenarios illustrate a broad range of possible growth and inflation outcomes depending on the intensity, duration and indirect and second-round effects of the energy shock.
The bank said the euro area economy proved resilient in the second quarter despite the energy shock, with broad-based growth across countries and sectors that was likely to have continued into the third quarter. Manufacturing remained solid amid higher government spending on defence and infrastructure, while consumer confidence rebounded from low levels and supported a recovery in services. AI-related activity was visible in digital services, business investment and exports. The labour market stayed robust, with the unemployment rate unchanged at 6.4% in July, although employment and labour-force growth continued to slow and productivity gradually picked up.
The ECB said its near-term growth outlook improved compared with the previous staff projections, supported by private consumption and public spending. Over the medium term, consumption should benefit from gradually falling energy prices and a strong labour market, while business and housing investment should provide additional support. Export growth should benefit from rising foreign demand but remains constrained by competitiveness challenges and uncertainty over global trade policies. The bank said higher potential growth requires structural reform and sound public finances, including simplification of rules in the EU Single Market, acceleration of the energy transition and completion of the savings and investments union. It also said the legal framework for the digital euro is moving into its final stage and that agreement on the Single Currency package should be reached quickly. Fiscal responses to the energy shock should be temporary, targeted and tailored.
Inflation rose to 3.3% in August from 2.9% in July. Energy price inflation increased to 14.3% from 10.3%, likely reflecting strong refining margins on liquid fuels and higher energy commodity prices. Food price inflation was unchanged at 1.2%. Inflation excluding energy and food eased to 2.4% from 2.5%, with goods inflation rising from 0.9% to 1.2% and services inflation falling from 3.3% to 3.0%. Most measures of underlying inflation were broadly stable in July, and wages have not shown a material response to the energy shock at this stage. Compensation per employee grew at 3.3% in the second quarter, down from 3.5% in the first quarter, while rising productivity helped contain unit labour costs, which slowed to 2.6% from 3.5%. Unit profits rose from 0.3% to 2.2%. The ECB's wage tracker points to a modest increase in negotiated wage growth to 2.7% in the first half of 2027. Shorter-horizon inflation expectations remain elevated, while most longer-term measures stand around 2%, supporting medium-term stabilisation around target.
The bank said the Middle East conflict and developments in Russia's war against Ukraine have pushed energy prices higher, keeping headline inflation well above target into the first half of 2027. Energy inflation should then decline and turn negative by mid-2028, bringing headline inflation down. Higher energy prices are expected to feed through gradually to core and food inflation, while the improved economic outlook should support slightly higher core inflation, which is expected to keep rising until early 2027, remain elevated for the rest of the year and moderate in 2028. Headline inflation is expected to return to around target towards the end of 2027, supported by higher interest rates. The ECB said it will continue monitoring the size and persistence of the energy price increase and its feedthrough to prices, wages, expectations and economic dynamics.
The ECB said risks to growth are to the downside, citing the Middle East conflict and developments in Russia's war against Ukraine. Renewed disruption to energy supplies could push prices higher for longer, weighing on real incomes, spending and investment. Worsening global financial-market sentiment or spillovers in bond markets could tighten credit conditions and dampen demand, while renewed trade tensions could disrupt supply chains and reduce exports, consumption and investment. Upside growth risks include faster adaptation by the economy and energy markets, sustainable resolution of the conflicts, adoption of new technologies by euro area firms, spending on defence and infrastructure, and reforms to enhance productivity and complete the EU Single Market. The Governing Council said it remains well positioned to navigate the uncertainty caused by the conflict and will follow a data-dependent, meeting-by-meeting approach to determine the appropriate monetary policy stance. Its decisions will be based on the inflation outlook, incoming economic and financial data, underlying inflation dynamics and monetary policy transmission. It is not pre-committing to a particular rate path.
