ECB raises key interest rates by 25 basis points amid war-driven inflation risks

The European Central Bank's Governing Council voted to lift its three principal interest rates by 25 basis points, setting the deposit facility at 2.25%, the main refinancing operation at 2.40% and the marginal lending facility at 2.65% effective 17 June 2026. The move aims to keep inflation anchored to the ECB's 2% medium-term target as the war in the Middle East adds pressure to price stability.

Staff projections now expect headline inflation to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028, with core inflation (excluding energy and food) projected at 2.5% in 2026-27 and 2.2% in 2028. These forecasts were revised upward for 2026-27 due to higher energy price paths, which could spill over into broader price components. Economic growth is projected at 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028, reflecting a downward adjustment for the near term because of the war's impact on commodity markets, real incomes and confidence.

The council highlighted that the outlook remains uncertain, with upside risks to inflation and downside risks to growth, depending on the duration and intensity of energy price shocks and their secondary effects. It pledged a data-dependent, meeting-by-meeting approach, emphasizing that no specific rate path is pre-committed.

The asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP) continue to shrink as the Eurosystem stops reinvesting principal repayments. The Governing Council also noted that the Transmission Protection Instrument remains available to address any disorderly market dynamics that could threaten monetary policy transmission across the euro area.

"The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today," the statement added.