European Central Bank Raises Interest Rates Amid Persistent Inflation

The European Central Bank has raised interest rates by 0.25 percentage points to combat rising inflation. The deposit rate has increased to 2.50 percent, while the main refinancing operations rate rose to 2.65 percent and the marginal lending rate to 2.90 percent. President Christine Lagarde stated that inflation is expected to remain well above the 2 percent target for a prolonged period, noting that the economy has remained resilient. This resilience is reflected in revised GDP projections, with the 2026 estimate raised to 0.9 percent and the 2027 estimate to 1.4 percent.

Inflation in the euro zone rose to 3.3 percent in August from 2.9 percent, driven largely by a 14.3 percent increase in energy costs. The ECB has revised its inflation projections upward for 2027 and 2028. While center leaning sources focus on the rate hike as a tool to fight the inflation jump, a center right source highlights the perspective of Italian Economy Minister Giancarlo Giorgetti, who suggested that stopping wars would be a more effective response than cooling the economy through monetary policy.

Global bond yields have hit multi year highs. The 10 year Bund reached 3.5 percent, its highest level since 2011, and the Btp reached 4.37 percent. Similar trends were noted in the US and UK markets. Lagarde attributed the surge in yields to global factors, including supply and demand dynamics and capital demand for artificial intelligence investments. The ECB indicated that future decisions will be made on a meeting by meeting basis based on incoming data.