The Governing Council decided to raise the key ECB interest rates by 25 basis points in September, following a previous increase of the same size in June. This decision comes as headline inflation increased to 3.8% in September, a rise primarily driven by a surge in energy inflation, alongside increases in food and services inflation. Core inflation saw a slight increase to 2.5% during the same period.
Looking ahead, the ECB anticipates that higher energy prices will keep headline inflation well above target into the first half of 2027. While inflation is expected to decline after the first quarter as energy costs fall, the bank projects it will only return to around target levels towards the end of 2027. The inflation outlook remains subject to upside risks, particularly stemming from the Middle East conflict and Russia’s war against Ukraine.
Economic growth projections for the euro area remain modest. The September ECB staff projections foresee growth of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. The bank noted that while growth has been resilient, tightening financing conditions and rising long-term interest rates are expected to slow growth and reduce price pass-through more than previously projected.
Regarding financial stability, the ECB noted continued stress in private credit markets, where funds are reporting outflows and reactivating redemption gates. However, the bank observed that euro area banks maintain strong capital and liquidity buffers, robust profitability, and stable asset quality. While non-bank financial intermediaries present risks, the bank noted that euro area financial institutions currently have limited direct exposure to private credit.
In the digital finance space, the Eurosystem is progressing with the digital euro project, planning a 12-month internal pilot in the second half of 2027. Additionally, the 'Pontes' distributed ledger technology (DLT) solution went live on 21 September, marking a step toward a European tokenised ecosystem under the Appia initiative.