Monetary policy decisions

The Governing Council hiked 25bp, taking the deposit rate to 2.50% effective 16 September 2026, and framed the Middle East conflict as an ongoing source of inflation pressure. The new staff projections revise 2027 and 2028 inflation UP, with headline still at 2.1% and core at 2.3% at the end of the horizon, and growth revised up for 2026 and 2027 on greater than expected resilience. Risks are explicitly skewed to the upside for inflation. Nothing here closes the door on further hikes.

What’s new: The genuinely new content is the projection round, not the hike. Inflation is revised up for both 2027 and 2028, and the end-horizon numbers do not sit at target: headline 2.1% in 2028 and core 2.3% in 2028. Growth is revised up for 2026 and 2027. That combination, plus an explicit upside skew to inflation risk, is the hawkish delta. The statement declines to signal a terminal rate and keeps the standard no-pre-commitment language, so the path beyond this meeting is unresolved.

KEY FINDINGS

• Deposit rate raised 25bp to 2.50%, MRO to 2.65%, MLF to 2.90%, effective 16 September 2026. Confirms the tightening cycle is live rather than a one-off, and repositions the front end around a higher near-term floor.
• Inflation projections revised UP for 2027 and 2028; 2026 unchanged at 3.0%, with 2027 at 2.5% and 2028 at 2.1%. A projection that does not reach target until the very end of the horizon is the standard staff justification for more tightening, so it argues against pricing an imminent stop.
• Core inflation projected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028: core is higher than headline at the end of the horizon and rises before it falls. Underlying inflation above 2% throughout the horizon is the harder number to dismiss and supports a higher terminal than currently priced.
• Growth revised up for 2026 and 2027 'mainly reflecting the greater than expected resilience of the euro area economy'. Removes the growth-based objection to further hikes and reduces the case for a dovish pivot on activity grounds.
• Risks explicitly to the upside for inflation and downside for growth, with staff scenarios flagging indirect and second-round effects of the energy shock. Second-round effect language is the trigger the Council uses to justify going further, and it keeps the tail of additional hikes fat.
• APP and PEPP portfolios running off in full with no reinvestment; TPI kept available. Passive QT continues alongside rate hikes, so duration supply stays a headwind while spread risk retains its backstop.

FROM THE DOCUMENT

The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.

Compared with June, the baseline projection for inflation in 2026 is unchanged, while it has been revised up for 2027 and 2028.

The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.

The Governing Council is not pre-committing to a particular rate path.