The ECB raised its three key interest rates by 25bp on Thursday, taking the deposit rate from 2.25% to 2.50%, as the Governing Council warned that the Middle East conflict continues to generate inflation pressure. The statement said inflation is set to remain “well above target for an extended period”, reinforcing the case for another step in policy normalization. The decision was framed as necessary to ensure inflation stabilizes at the 2% target over the medium term, but the ECB again stressed that it is “not pre-committing to a particular rate path.”
The more important development came from the new staff projections. Headline inflation for 2026 was unchanged from 3.0% to 3.0%, but the 2027 forecast was revised from 2.3% to 2.5% and 2028 from 2.0% to 2.1%. Core inflation was also unchanged from 2.5% to 2.5% for 2026, while 2027 was raised from 2.5% to 2.6% and 2028 from 2.2% to 2.3%. The fact that revisions extend beyond headline energy inflation into the core measure suggests the ECB expects somewhat more persistent underlying price pressure than it did in June.
Headline Inflation
| Year | June | September | Revision |
|---|---|---|---|
| 2026 | 3.0% | 3.0% | Unchanged |
| 2027 | 2.3% | 2.5% | +0.2 ppt |
| 2028 | 2.0% | 2.1% | +0.1 ppt |
Core Inflation
| Year | June | September | Revision |
|---|---|---|---|
| 2026 | 2.5% | 2.5% | Unchanged |
| 2027 | 2.5% | 2.6% | +0.1 ppt |
| 2028 | 2.2% | 2.3% | +0.1 ppt |
Growth, however, was revised in the opposite direction from what a worsening inflation shock might normally imply. The 2026 GDP forecast was raised from 0.8% to 0.9%, while 2027 was upgraded from 1.2% to 1.4%. The 2028 projection was unchanged from 1.5% to 1.5%. The ECB attributed the upgrades mainly to the “greater than expected resilience of the euro area economy.” That leaves the September baseline with a less stagflationary mix than June: inflation is more persistent, but economic activity is also holding up better.
GDP Growth
| Year | June | September | Revision |
|---|---|---|---|
| 2026 | 0.8% | 0.9% | +0.1 ppt |
| 2027 | 1.2% | 1.4% | +0.2 ppt |
| 2028 | 1.5% | 1.5% | Unchanged |
The risk assessment nevertheless remains uncomfortable. The ECB continues to see inflation risks tilted to the upside and growth risks tilted to the downside, with the eventual impact of the energy shock depending on its “intensity and duration” as well as its “indirect and second-round effects.” That language matters because the central policy question is no longer just how high energy prices rise, but whether those costs spread into wages, services and broader underlying inflation. The upward revisions to 2027 and 2028 core inflation make that issue more prominent in the baseline itself.
For the rate path, the September projections give the ECB more room to keep tightening than a simple energy-shock story would suggest. Inflation has been revised higher beyond 2026, core inflation remains above target through 2028, and the growth outlook has strengthened rather than weakened. But today’s statement stops short of signaling another automatic move. The ECB will continue to decide meeting by meeting, leaving the next step dependent on whether incoming data confirm that inflation persistence is broadening rather than merely reflecting the current energy shock.
Key Takeaways
- ECB raised the deposit rate by 25bp from 2.25% to 2.50%, warning that inflation will remain “well above target for an extended period.”
- September projections left 2026 headline and core inflation unchanged, but raised both measures for 2027 and 2028, pointing to greater persistence beyond the immediate energy shock.
- Growth forecasts were upgraded for 2026 and 2027 on the “greater than expected resilience of the euro area economy,” giving the ECB a stronger activity backdrop alongside firmer inflation.
- The ECB still sees upside risks to inflation and downside risks to growth, with the impact of the Middle East shock depending on its intensity, duration and second-round effects.
- The Governing Council remains data-dependent and “not pre-committing to a particular rate path,” so the projections support further tightening risk without guaranteeing another hike.
