The European Central Bank raised all three of its key interest rates by a quarter point this afternoon. The deposit facility rate, the rate the bank pays commercial banks on money they leave with it and its main lever on eurozone borrowing costs, rises to 2.50% when the decision takes effect on 16 September. The main refinancing rate goes to 2.65% and the marginal lending rate to 2.90%. It is the second increase this year, after a surprise rise in June, and it leaves the deposit rate at its highest since the spring of 2025. Markets had priced the move in full, and a Reuters poll last week found all 65 economists surveyed expecting it.
Energy is doing the work. Euro area inflation rose to 3.3% in August on Eurostat's first estimate, up from 2.9% in July, and the energy component alone climbed 14.3% over the year against 10.3% a month earlier. Brent crude passed $105 a barrel on Thursday, the highest since 19 May and roughly 18% above where it stood a month ago, as strikes in the Middle East kept supply in question. Services inflation, the part that tracks domestic wages and margins most closely, actually cooled to 3.0% from 3.3%. The bank is raising rates against a price increase it did not cause and cannot influence.
Its own staff now expect inflation to average 3.0% this year, 2.5% in 2027 and 2.1% in 2028, with the 2027 figure revised up since June, alongside growth of 0.9%, 1.4% and 1.5% across the same three years. Christine Lagarde said inflation would stay above target through the first half of 2027 and return to it towards the end of that year, warned that the energy shock "could intensify further", and declined to say what comes next, telling reporters she could not anticipate the following move. The Governing Council repeated that it is not committing to any rate path. Nine in ten of the economists in that Reuters poll expect 2.50% to stand until the end of the year.
What it means for GBP/EUR
Sterling did not move. GBP/EUR traded around 1.1643 in the hours after the announcement, inside a daily range of 1.1640 to 1.1652 and a shade below Wednesday's close of 1.1645, which is what a fully expected decision usually looks like. What has changed is the gap between the two central banks. Bank Rate stands at 3.75% against the ECB's 2.50%, an advantage of 125 basis points rather than the 150 that applied through August, narrowing exactly as the German confidence data implied it would. The Bank of England is expected to hold on 17 September, markets now price a quarter point rise by December, and ten year gilt yields near 5.30% sit at their highest in nineteen years. Next week, not this afternoon, is where the pair takes its direction. For a business with euro payments to make this autumn, a forward contract fixes today's rate for a settlement date in the future, which puts that decision before the meeting rather than after it.
