Key facts
- The European Central Bank is expected to pause interest rate hikes on Thursday.
- The decision comes amid renewed fighting in the Middle East and ongoing inflation concerns.
- The deposit rate is anticipated to remain at 2.25%.
- The ECB's Governing Council decided to keep key interest rates unchanged in a July 2025 press conference.
- In June 2026, the ECB raised key interest rates by 25 basis points.
- Headline inflation is projected to average 3.0% in 2026 and 2.0% by 2028.
The European Central Bank is poised to maintain its current interest rates on Thursday, seeking time to evaluate the economic repercussions of escalating conflict in the Middle East. Market participants and analysts widely anticipate that the ECB will refrain from another rate increase so soon after the previous month's adjustment, leaving the deposit rate at 2.25%. This level has been previously described by officials as appropriate while they consider the implications of the US-Iran conflict's re-escalation.
In a July 2025 press conference, ECB President Christine Lagarde and Vice-President Luis de Guindos announced that the Governing Council had decided to keep the three key ECB interest rates unchanged. They noted that inflation was at the 2% medium-term target, with incoming information aligning with previous assessments. Domestic price pressures were easing, and wages were growing more slowly. The economy had shown resilience, though the environment remained uncertain due to trade disputes. The ECB reiterated its commitment to ensuring inflation stabilizes at 2% and stated its decisions would be data-dependent.
Economic activity in the first quarter grew stronger than anticipated, partly due to firms front-loading exports before expected tariff hikes. Growth was also supported by private consumption and investment. Recent surveys indicated modest expansion in manufacturing and services, but higher tariffs, a stronger euro, and geopolitical uncertainty were making firms more hesitant to invest. The robust labor market and rising real incomes supported consumption, with unemployment at 6.3% in May. Easier financing conditions were underpinning domestic demand.
Annual inflation stood at 2.0% in June, with energy prices lower than a year prior. Food price inflation eased slightly to 3.1%, goods inflation decreased to 0.5%, and services inflation rose to 3.3%. Underlying inflation indicators were consistent with the 2% target, and labor costs were moderating.
However, a press release from June 11, 2026, indicated that the Governing Council decided to raise the three key ECB interest rates by 25 basis points, bringing the deposit facility rate to 2.25%, main refinancing operations to 2.40%, and marginal lending facility to 2.65% effective June 17, 2026. This decision was made in response to inflation pressures generated by the war in the Middle East. The baseline projection for headline inflation was revised upwards to an average of 3.0% in 2026, with economic growth revised downward to 0.8% for 2026, reflecting the war's impact on commodity markets, real incomes, and confidence. The outlook remained uncertain, with upside risks for inflation and downside risks for growth.