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...