The European Central Bank, for the first time in three years, has decided to increase its three key interest rates by 25 basis points. The war in the Middle East is creating inflationary pressures, and the decision to raise interest rates is appropriate for a series of scenarios describing how the disruption could evolve and affect medium-term prospects for the eurozone.
ECB: War impacts and downward revision
According to the baseline scenario 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. Regarding inflation excluding energy and food, the baseline scenario projects it will average 2.5% in 2026 and 2027, and 2.2% in 2028. Compared to the March edition, experts have revised upward the baseline scenario projection for inflation for 2026 and 2027 due to a more upward trajectory in energy prices, which – to some extent – is expected to spill over into food, goods, and services inflation. According to the baseline scenario, economic growth is expected to average 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. This represents a downward revision for 2026 and 2027, reflecting the stronger impact of war on commodity markets, real incomes, and confidence.
The outlook remains uncertain, with upside risks to inflation and downside risks to economic growth. The full impact of the war on inflation and growth in the medium term will depend on the intensity and duration of energy price disruption, as well as the extent of its indirect and secondary effects. This uncertainty is also reflected in a wide range of results for inflation and growth in the updated indicative scenarios prepared by Eurosystem experts. These scenarios will be published together with the staff projections on the ECB website.
With today’s decision, the Governing Council remains positioned to address the uncertainty caused by the war. It will monitor the situation carefully, following a data-dependent approach and making decisions meeting by meeting to determine the appropriate direction of monetary policy. Specifically, the Governing Council’s interest rate decisions will be based on its assessment of inflation outlook and surrounding risks, in light of incoming economic and financial data, as well as the dynamics of underlying inflation and the intensity of monetary policy transmission. The Governing Council is not pre-committed to a particular rate path.
ECB key interest rates
The Governing Council decided to raise the ECB’s three key interest rates by 25 basis points. Consequently, the rates on the deposit facility, main refinancing operations, and marginal lending facility will be increased to 2.25%, 2.40%, and 2.65% respectively, effective from June 17, 2026.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP and PEPP portfolios are declining at a measured and predictable pace, as the Eurosystem is no longer reinvesting amounts from securities redemptions at maturity.
