European Central Bank raises rates, projects euro area GDP growth of 0.9% for 2026

The European Central Bank hiked interest rates by 25 basis points on September 10 and released a set of macroeconomic projections. The baseline forecast now calls for real GDP growth of 0.9% in 2026, a modest upward revision of 0.1 percentage points from the June projection. Growth is expected to accelerate to 1.4% in 2027 and 1.5% in 2028, powered by stronger domestic demand and a labor market that has proven surprisingly resilient.

The rate decision and what it means

The Governing Council’s decision pushes the deposit facility rate to 2.50%, the main refinancing operations rate to 2.65%, and the marginal lending facility rate to 2.90%. All three take effect on September 16.

Headline inflation, measured by the Harmonised Index of Consumer Prices (HICP), is projected to average 3.0% in 2026, largely because energy prices remain elevated thanks to ongoing conflict in the Middle East. The path back to target is slow: 2.5% in 2027, finally reaching 2.1% in 2028.

Three scenarios, one nightmare

What makes this projection round unusual is the inclusion of three alternative scenarios, all tied to how the Middle East conflict evolves.

The mildest scenario assumes a quicker normalization of energy markets, with the conflict de-escalating faster than expected, energy prices dropping, and growth coming in above baseline with inflation cooling more rapidly.

The adverse scenario assumes the conflict intensifies enough to keep energy prices elevated for longer, dragging on growth and keeping inflation stickier than the baseline suggests.

The severe scenario projects GDP growth collapsing to negative 0.4% in 2027, meaning an outright contraction, while inflation could spike to 5.4%.

What’s holding the economy together

Consumer spending has held up, employment across the euro area has remained robust, and public investment including spending tied to the EU’s post-pandemic recovery programs continues to inject demand into the economy. Energy costs are expected to peak in late 2026 before gradually receding.

Implications for markets and monetary policy

The projections carry a data cut-off date of August 28, meaning any significant developments in the Middle East since then aren’t captured.

The ECB publishes these projections quarterly, in March, June, September, and December. The next update will arrive in December 2026.

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