ECB lifts the deposit rate to 2.50 percent and raises the 2027 inflation forecast

The European Central Bank raised all three of its key rates by 25 basis points on Thursday and told the public that inflation will stay "well above target for an extended period," a sentence that did more to move markets than the hike itself.

The deposit facility goes to 2.50 percent, the main refinancing rate to 2.65 percent and the marginal lending facility to 2.90 percent, effective 16 September. It is the second increase this year. The meeting was held in Berlin, the once-a-year session the Governing Council takes on the road.

President Christine Lagarde described the decision as unanimous and a "no-brainer." Two-year euro swap rates jumped about 15 basis points. Markets now price roughly 88 basis points of further tightening, with the peak in September 2027, according to one post-meeting desk note.

The new numbers

Staff projections put headline inflation at 3.0 percent in 2026, 2.5 percent in 2027 and 2.1 percent in 2028. The 2026 figure is unchanged from June. The 2027 and 2028 figures were revised up. Inflation excluding energy and food is seen at 2.5 percent in 2026, 2.6 percent in 2027 and 2.3 percent in 2028. Growth was revised up to 0.9 percent in 2026 and 1.4 percent in 2027, with 1.5 percent in 2028. The bank said the growth upgrade reflects "greater than expected resilience" in the euro area.

The statement is explicit about the source. "The conflict in the Middle East continues to generate inflation pressures." Oil and gas prices tied to the Iran war pushed euro-area inflation through 3 percent last month. Diesel and freight feed into almost every goods price. The Governing Council said risks to inflation are to the upside and risks to growth are to the downside, and published a set of energy-shock scenarios rather than pretending it can see a single path.

Neutral, and not a promise

A deposit rate of 2.50 percent sits at the top of the range many governors have called "neutral," the setting that neither stimulates nor restricts. That is why the language around the next meeting matters more than the 25 basis points. The Council said it is "not pre-committing to a particular rate path." Lagarde's "no-brainer" line, and the focus on energy rather than on wages, is why several bank economists now expect hikes in both October and December.

Underlying inflation and pay growth have been less noisy than the energy spike. The bank spent less time on those measures than some of its own recent speeches had suggested it would. That shift in the reaction function is the hawkish surprise. If governors are reacting to the oil price first, then a war that does not end before the midterms in the United States keeps the ECB in play through winter.

What the hike does not do

It does not put cheaper diesel in French pumps. It does not reopen Hormuz. It does not change the fact that a 21-country currency union is importing an inflation shock from a war it is not fighting. What it does is raise the cost of rolling over credit for firms and households that have already watched energy bills jump. The growth upgrade in the staff papers assumes they can absorb that. The downside scenario in the same papers assumes they cannot.

US stocks rose on Friday after oil eased and an American inflation print came in near forecasts. The S&P 500 gained 0.9 percent and broke a four-day losing streak. That relief is not the ECB's problem and is not the ECB's forecast. Frankfurt is staring at 3 percent inflation this year and at a war whose duration it does not control.

The next scheduled decision is in October. By then Monday's Hormuz meeting in Oman will have either produced a corridor or failed to. That outcome will sit on the table in Frankfurt more loudly than any wage chart.