ECB lifts deposit rate to 2.50% as Iran-war energy costs keep inflation high

The European Central Bank raised its three key interest rates by 25 basis points on 10 September, taking the deposit facility to 2.50%, the main refinancing rate to 2.65% and the marginal lending facility to 2.90% from 16 September.

The Governing Council met in Berlin, continuing the practice of holding one policy meeting a year outside Frankfurt. The statement named the cause in the first paragraph: the conflict in the Middle East is generating inflation pressure, and inflation is set to remain well above the 2% target for an extended period.

This is the ECB's second increase in 2026. The deposit rate had stood at 2.25%. Markets had treated a quarter-point move as close to certain. The open question is whether another increase follows before the year ends.

The new staff numbers

ECB staff now see headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The 2026 figure is unchanged from June. The 2027 and 2028 figures were revised up. Inflation excluding energy and food is projected at 2.5% this year, 2.6% in 2027 and 2.3% in 2028. Core inflation still sits above target in the last year of the forecast.

Growth was marked up. Staff now project euro-area GDP at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. That is higher than June for both 2026 and 2027, which the bank attributed to greater resilience than expected. The same statement warned that risks to inflation sit on the upside and risks to growth sit on the downside.

Staff prepared scenarios around the energy shock. They vary the intensity and duration of the conflict and the size of second-round effects on wages. The bank published the range rather than a single alternative path, a sign that officials do not treat the war as a brief spike.

Why energy is doing the work

Oil and gas prices have pushed euro-area inflation back above 3%. Reuters reported that the rise is driven entirely by energy costs from the Iran war, which began in late February when the United States and Israel opened a campaign against Iran. Brent crude crossed $100 a barrel this week and traded near $105 on Friday after a pullback from about $108.

Christine Lagarde, the ECB president, said future decisions will depend on the data at each meeting. She did not pre-commit to a path. Money markets after the decision priced in about 0.60 percentage points of further increases by April 2027.

The new deposit rate sits at the top of the range many Governing Council members describe as neutral, meaning it neither stimulates nor restrains growth on its own. That framing matters. If energy prices stay high and feed into wage deals, the bank will have to move the rate into restrictive territory. If the war eases and oil falls, the case for another hike weakens.

What households and firms will feel

Euro-area households with variable-rate mortgages will see another step up from mid-September. Firms that rolled short-term credit through the summer will refinance at a higher cost. Banks earn more on deposits held at the ECB, which can support net interest margins even if loan demand cools.

The growth upgrade sits beside that tightening. Officials are betting that the economy can absorb a higher policy rate because demand has held up better than they expected in June. That bet fails if energy costs cut real incomes faster than the models assume, or if shipping through the Strait of Hormuz and the Red Sea tightens again.

The Houthi seizure of Mocha on 10 September added a second chokepoint risk to the same energy complex. Diesel in the United States passed $6 a gallon for the first time on the same week. Those prices do not set euro-area policy, but they show how far the shock has already travelled through the fuel that moves freight.

The next scheduled policy meeting will test whether Lagarde's data-dependence language is a pause or a delay. Until then the rates that banks pay and receive in the euro system are 2.50%, 2.65% and 2.90%, and the forecast says inflation will still miss the target in 2028.