ECB raises key interest rates by 25bps

European Central Bank President Christine Lagarde explained during the press conference that the decision was based on three alternative scenarios prepared by the ECB’s staff economists: a baseline scenario, an adverse scenario, and a severe stress scenario. As she noted, without today’s policy intervention, both inflation and economic growth would be expected to deviate from the ECB’s medium-term objectives.

According to the latest staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Core inflation, which excludes energy and food prices, is projected at 2.5% in both 2026 and 2027 before easing to 2.2% in 2028.

Compared with the projections published in March, ECB economists have revised their inflation forecasts upward for both 2026 and 2027, reflecting the continued increase in energy prices. Higher energy costs are expected to pass through gradually to food prices, goods, and services, exerting broader inflationary pressures across the economy.

At the same time, the growth outlook has weakened. The ECB now forecasts euro area GDP growth of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. These projections are lower than previous estimates and reflect the adverse impact of geopolitical tensions on energy markets, household real incomes, and business confidence across the euro area.