The European Central Bank (ECB) raised its key policy interest rates by 25 basis points at its September meeting yesterday. This marked the ECB’s second interest rate hike this year, as it looks to contain an energy-driven rise in inflation tied to the ongoing US-Iran war. The Bank of Canada held interest rates steady at its last meeting, while the US Federal Reserve Board makes its next interest rate announcement on September 16.

• The ECB raised its main refinancing rate to 2.65%, which is its highest level since last April. The deposit facility rate and marginal lending rate were also raised, to 2.50% and 2.90%, respectively.
• The ECB expects inflation to stay elevated. The ECB held its 2026 inflation forecast at 3.0%, well above its 2% target, but revised its 2027 and 2028 projections higher, to 2.5% and 2.1%, respectively.
• Europe’s central bank upgraded its eurozone economic growth outlook to 0.9% for 2026 and 1.4% for 2027. ECB President Christine Lagarde said policymakers had been “surprised” by the European Union’s economy’s resilience, noting that data received since the forecast cutoff point to even stronger 2026 growth than projected.
• In her press conference, Lagarde warned that prices and wages could rise further if the energy shock continues to intensify.
• Lagarde wouldn’t commit to what’s next for the ECB. Lagarde said the ECB cannot predict its next move at this point. While food inflation has cooled faster than expected, she said overall inflation is proving more persistent than anticipated.

Yesterday’s interest rate hike by the ECB is a reminder that the energy shock from the Middle East conflict is a global story, not just a Canada-US one. With economic growth holding up better than feared and inflation risks still tilted higher, the ECB left the door open to further monetary tightening if energy price pressures persist.

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