Published on: 2026-09-11
Updated on: 2026-09-11
The ECB raised all three key rates by 25 basis points on 10 September, taking the deposit rate to 2.50% from 16 September.
Inflation forecasts for 2027 and 2028 were revised up to 2.5% and 2.1%, while growth was upgraded to 0.9% in 2026 and 1.4% in 2027.
EUR/USD dipped below 1.1600 on the news and steadied near 1.1610, with the hike already fully priced.
Markets now price more tightening than the ECB’s own baseline requires, leaving the euro’s rate support exposed.
The next tests are US CPI on 11 September, the Fed decision on 16 September and the ECB on 29 October.
The European Central Bank raised its deposit rate by 25 basis points to 2.50% on 10 September and revised its inflation forecasts higher for 2027 and 2028. The message from Frankfurt was clear: the energy shock has lengthened the road back to 2%.
The euro barely responded. EUR/USD slipped below 1.1600 after the announcement, recovered into the New York close and held near 1.1610 in early Asian trading on 11 September.
The muted reaction owes more to the dollar than to the euro. Hot US producer prices and a live Federal Reserve meeting on 15 and 16 September are pulling harder on the pair than anything the ECB delivered.
The Governing Council raised all three key rates by 25 basis points, effective 16 September.
| ECB rate | Previous | From 16 September |
|---|---|---|
| Deposit facility | 2.25% | 2.50% |
| Main refinancing operations | 2.40% | 2.65% |
| Marginal lending facility | 2.65% | 2.90% |
The increase was the second of 2026, following June’s hike and a pause in July. President Christine Lagarde described the decision as unanimous and straightforward, while stressing that policy will be set meeting by meeting and that the Council is not pre-committing to any rate path.
The accompanying statement was blunt about duration. The conflict in the Middle East continues to generate price pressures, and inflation is expected to remain well above target for an extended period.
Money markets had fully discounted the hike, so the news value lay in the projections.
Headline inflation is now expected to average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The 2026 estimate is unchanged from June, while 2027 and 2028 were revised higher, from 2.3% and 2.0% respectively.
| Year | June projection | September projection |
|---|---|---|
| 2026 | 3.0% | 3.0% |
| 2027 | 2.3% | 2.5% |
| 2028 | 2.0% | 2.1% |
The sharper signal comes from the core projections, which see inflation excluding energy and food at 2.5% this year, 2.6% in 2027 and 2.3% in 2028. Underlying prices therefore peak later than headline inflation and remain above target across the entire forecast horizon.
The profile points to a slower pass-through from energy into non-energy prices. The ECB expects some of that pressure to reach core and food inflation gradually, although its baseline still assumes indirect and second-round effects remain contained.
Headline inflation is expected to stay well above target into the first half of 2027 before energy inflation turns negative through mid-2028.
Euro area inflation accelerated to 3.3% in August from 2.9% in July. Energy inflation jumped to 14.3% from 10.3%, lifted by refining margins on liquid fuels and higher commodity prices, with Brent trading above $100 a barrel and European gas at multi-year highs.
The rest of the basket remains contained. Inflation excluding energy and food edged down to 2.4% from 2.5%, services inflation eased to 3.0% from 3.3%, and food held at 1.2%. Goods inflation rose to 1.2% from 0.9%, which is where indirect pass-through tends to appear first.
Wage data show no response to the shock so far. Compensation per employee grew 3.3% year on year in the second quarter, down from 3.5%, and unit labour cost growth slowed to 2.6% as productivity improved. Unit profit growth, meanwhile, accelerated to 2.2% from 0.3%, even as slower wage growth and improving productivity reduced pressure from unit labour costs. The ECB’s wage tracker points to negotiated wage growth of just 2.7% in the first half of 2027.
The Council is trying to prevent second-round effects from becoming more pronounced, because the risk increases the longer energy prices remain elevated.
The September round also upgraded growth. Euro area GDP is projected to expand 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028, with the first two years revised higher on greater than expected resilience.
Lagarde cited broad-based second-quarter growth, with manufacturing supported by defence and infrastructure spending, recovering consumer confidence, and AI-related momentum in digital services and exports. Unemployment held at 6.4% in July.
A central bank tightens into strength more comfortably than into weakness, so the growth upgrade feeds rate expectations as directly as the inflation revision does. The Council still frames risks as tilted upward for inflation and downward for growth.
A fully priced hike delivers no fresh yield support, and EUR/USD traded accordingly. The pair fell to roughly 1.1595 in the hours after the decision and recovered to about 1.1620 late in the session, before consolidating near 1.1610 overnight.
The pressure came from the dollar side, where US producer prices rose 0.4% in August and 5.4% over twelve months, up from 4.8% annually in July, with diesel jumping 24.1% and final demand energy up 4.2%. Futures markets lifted the implied probability of a Fed hike at next week’s meeting in response.
The rate gap also continues to work against the euro. The Fed’s target range sits at 3.50% to 3.75%, so the ECB’s move narrows the differential to roughly 100 to 125 basis points, from 125 to 150. The nominal short-term policy differential therefore continues to favour the dollar, even after the ECB’s September increase.
Markets moved further toward tightening after the decision. As of 10 September, pricing implied roughly a 49% chance of another hike in October, an 89% chance of at least one further increase by December, and around 60 basis points of additional tightening by April 2027.
That path is more aggressive than the ECB’s own baseline requires. The September projections already return inflation to around 2% late in 2027 at current rates, so markets are trading the upside energy scenario rather than the central case. The euro’s rate support rests on a forecast branch the Council has not endorsed, which skews the risk lower: a softer energy print would remove more support than an equivalent upside surprise would add.
The demand side points the same way. Europe imports its energy, so higher oil and gas prices squeeze household real incomes even as they push the ECB toward tightening. A hot US inflation print that triggers a Fed hike next week would re-widen the differential and put 1.15 back in view.
The pair should therefore hold its range until one central bank clearly outpaces the other.
The immediate catalyst is the US consumer price report for August, due at 8:30 a.m. ET on 11 September. July inflation ran at 3.4%, with core at 2.5%, and consensus expects a 0.4% monthly rise. The Federal Reserve announces policy on 16 September.
Beyond the United States, the checklist is European. Watch whether headline inflation extends its climb, whether energy costs seep further into services and core goods, and whether negotiated wages begin to respond.
The ECB’s next decision falls on 29 October. Nothing in the September communication pre-signals the outcome, so 2.50% reads as a waypoint rather than a peak until the data argue otherwise.
