The European Central Bank (ECB) raised interest rates by 0.25 percentage points on Thursday, warning that inflationary pressures remain elevated and signalling that price growth is likely to stay above its 2% target for an extended period.
The move had been widely anticipated by markets but came as oil prices climbed above $105 per barrel, reinforcing concerns that energy costs will continue to feed inflation in the months ahead.
Inflation outlook worsens
The ECB now expects headline inflation in the euro area to average:
- 3.0% in 2026
- 2.5% in 2027
- 2.1% in 2028
The 2027 forecast marks an upward revision from the 2.3% projected in June.
ECB President Christine Lagarde said the bank expects the 2% inflation target to be achieved only by the end of 2027.
Inflation excluding energy and food is also expected to remain elevated, averaging:
- 2.5% in 2026
- 2.6% in 2027
- 2.3% in 2028
Economists view the figures as evidence that inflation pressures have spread beyond energy and food prices.
Oil prices add to pressure
The ECB highlighted continued risks stemming from tensions in the Middle East.
Oil prices have risen by around 40% since the collapse of the ceasefire between the United States and Iran in early July, increasing concerns about the impact of energy costs on inflation and economic activity.
The central bank has assessed several scenarios based on the scale and duration of potential energy disruptions.
Markets expect further rate hikes
Following the ECB's latest decision, swap markets are now pricing in the possibility of two additional interest rate increases, one before the end of 2026 and another by March 2027.
The shift reflects growing expectations that policymakers may need to keep monetary policy restrictive for longer than previously anticipated.
Growth forecasts revised higher
Despite geopolitical uncertainty and higher energy prices, the ECB slightly improved its outlook for the eurozone economy.
It now forecasts economic growth of:
- 0.9% in 2026
- 1.4% in 2027
- 1.5% in 2028
The projections for both 2026 and 2027 were revised upwards from the estimates published in June.
The ECB said the changes reflect the greater-than-expected resilience of the eurozone economy.
Risks remain
While growth forecasts have improved, the ECB cautioned that uncertainties remain significant.
The bank continues to see upside risks to inflation and downside risks to economic growth, particularly if energy prices remain elevated or geopolitical tensions intensify.
