The ECB Hikes Again. Acting on Additional Tightening as Inflation Hits 3.3%.

At its September 10 Governing Council meeting, the ECB raised its three key rates together by +0.25% (deposit facility 2.50%). It made its first hike in about three years in June, then paused to assess in July. This time it ended that pause and moved to hike again. The "impact of the war" it had held rates steady in July to gauge showed up as a clear rise in August prices.

The trigger was a renewed pickup in inflation. August HICP (consumer prices) rose +3.3% year over year, up further from July's +2.9% to a roughly three-year high. The main driver was surging energy prices due to the Iran war (+14.3% year over year). President Lagarde described the hike as a "no-brainer" — a decision that left no room for doubt. She characterized risks to growth as tilted to the downside and risks to inflation to the upside, and said the Council would continue to "decide meeting by meeting based on the data."

The ECB kept negative rates (−0.50%) in place for a long time, but in response to post-pandemic inflation it hiked rapidly starting in July 2022. The deposit rate peaked at 4.00% in September 2023. It then fell to 2.00% through eight cuts, before reversing to 2.25% with June's first hike in about three years. Rates were held in July, but in September they were raised again by +0.25%, to 2.50%.

In just over a year rates climbed from negative to above 4%, then descended gradually before reversing in June. After pausing once in July, they turned higher again in September. The ECB views 2.00% as "a neutral level that neither stimulates nor cools the economy," and in response to sticky inflation it has stepped two notches (a total of +0.50%) above it. The shift from an easing phase toward tightening has become all the more pronounced.

August HICP (harmonized consumer prices) rose +3.3% year over year, up further from July's +2.9% to a roughly three-year high. The driver was the +14.3% jump in energy prices (July +10.3%). Meanwhile, core (excluding energy and food) came in at 2.4% and services at 3.0%, both easing — a hallmark of inflation with a strongly "energy-led" character.

While headline inflation far exceeds the 2% target, core — which reflects the underlying trend — has fallen to 2.4%. The ECB moved to hike because, rather than the near-term figures, it was wary of the "second-round effects" of high energy prices spilling over into wages and other prices. The new staff projections published the same day put inflation's return to the 2% target at late 2027, signaling an assumption that elevated prices will persist for the time being.

Whereas the central banks of Japan and the US mainly move a single rate, the ECB has three key rates. Chief among them, the "deposit facility rate (2.50%)" — the rate banks earn when placing funds with the ECB — is currently the de facto policy rate (the benchmark that steers market rates).

The marginal lending facility (2.90%) is the ceiling rate at which banks borrow overnight from the ECB, and the main refinancing operations rate (2.65%) sits in between. In September all three of these rates were raised together by +0.25%. The three form a corridor that sets the "ceiling, middle, and floor" of market rates, and the whole structure has shifted upward in parallel.

Monetary policy is set by the Governing Council, which meets roughly every six weeks. Attending are 27 people — the six Executive Board members at ECB headquarters plus the governors of the 21 countries that use the euro. But voting rights are limited to 21 votes, and the governors vote on a monthly rotation (Bulgaria joined in January 2026, bringing the total to 21 countries).

The governors' rotation is weighted by economic size. The top five countries — Germany, France, Italy, Spain and the Netherlands — share 4 votes, while the other 16 countries share 11 votes, each rotating monthly. Everyone takes part in the discussion, and decisions are mostly reached close to unanimity (by consensus).

The monetary policy Council meets eight times a year, roughly every six weeks. At the March, June, September and December meetings, ECB staff projections for the economy and prices are published, drawing particular market attention. The most recent was September 10 (projections published). The next is October 29.

Decisions are announced at 14:15 Central European Time, with the President's press conference beginning at 14:45. At the September 10 meeting, new staff economic projections were also published. If inflation settles as expected, the view of a pause may gain ground; conversely, if the war reignites energy prices, discussion of further additional hikes could get under way.

The euro is the world's second currency after the dollar. ECB rates heavily influence the euro's exchange rate. Although this hike was largely priced into markets, the prospect of further hikes was also in focus, and the euro held firm. Against Japan, with euro-area rates higher, a backdrop of a stronger euro and weaker yen continues.