The European Central Bank (ECB) is maintaining a cautious approach to monetary policy as inflation remains above its long-term target.

After raising interest rates by 0.25 percentage points in September 2026, policymakers indicated that further increases could be considered if price pressures remain persistent.

Interest Rates Rise for the Second Time in 2026

At its September meeting, the ECB increased its three key interest rates by 25 basis points. The deposit facility rate rose from 2.25% to 2.50%, marking the second increase during 2026. Higher policy rates make borrowing more expensive across the financial system. Commercial banks may adjust mortgage rates, business loans and other credit products in response, influencing spending and investment decisions.

The deposit facility rate is particularly important because it determines the interest banks receive when placing overnight funds with the central bank. Changes to this rate influence short-term money-market conditions and help guide broader financing costs.

Inflation Remains Above the ECB's Target

The ECB's September projections indicated that inflation would average 3.0% in 2026, before easing to 2.5% in 2027 and 2.1% in 2028. The forecasts for the final two years were revised upward compared with the previous projection exercise. Underlying inflation also remained a concern. Excluding energy and food, inflation was projected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.

These figures suggest that price pressures extend beyond temporary movements in energy costs. Higher production expenses can gradually affect transport, manufacturing and services, while businesses may pass part of those increases to customers. Central banks monitor underlying inflation because it can provide a clearer indication of whether price pressures are becoming persistent.

Why Further Tightening Remains Possible

ECB policymakers have indicated that additional interest rate increases may be necessary if inflation remains elevated. However, the timing of any future adjustment depends on incoming economic and financial information.

Energy prices are an important consideration because increases can affect household utility bills, transportation expenses and business operating costs. If higher costs spread into wages and other prices, inflation may remain elevated even after the original price shock begins to ease.

This process is sometimes described as a second-round effect. For example, businesses facing higher operating expenses may increase selling prices, while workers may seek higher wages to maintain purchasing power. The ECB therefore needs to assess whether inflation is temporary or becoming embedded in broader economic activity.

Economic Growth and Borrowing Conditions Require Balance

The September projections placed eurozone economic growth at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. The outlook was somewhat stronger than earlier estimates, partly reflecting resilience in household consumption and public spending. Nevertheless, higher interest rates can gradually weaken demand. Mortgage repayments may become more expensive for borrowers with variable-rate loans, while businesses may reconsider projects that depend on external financing.

The effects are not immediate. Monetary policy usually operates with delays as existing loans mature, banks adjust lending conditions and households and companies revise their financial plans. For this reason, policymakers must consider both inflation developments and the strength of economic activity before deciding whether further tightening is appropriate.

Expert Insight

Christine Lagarde, President of the European Central Bank, emphasised that future monetary policy decisions would remain flexible. During the September 10, 2026 press conference, she stated: “We are not pre-committing to a particular rate path.”

The ECB's September 2026 interest rate increase reflects continuing concerns about persistent inflation and the possibility that higher costs could spread across the eurozone economy. Although inflation is projected to moderate over the coming years, forecasts remain above the central bank's 2% target.

Further rate increases remain possible, but no predetermined schedule has been established. The direction of monetary policy will depend on inflation trends, economic growth and how financing conditions respond to earlier decisions. Maintaining price stability while supporting sustainable economic activity will remain the ECB's central challenge.