On September 10, the Management Committee of the European Central Bank (ECB) decided to raise three key interest rates by 25 basis points each. The deposit facility rate, the main refinancing operation rate, and the marginal lending rate will increase to 2.50%, 2.65%, and 2.90% respectively, starting from September 16. The official explanation is that the ongoing conflicts in the Middle East continue to exert upward pressure on inflation, which is expected to remain above the medium-term target of 2% for an extended period. This decision marks a shift in policy focus towards curbing price pressures, but the ECB also emphasized that it will not make prior commitments regarding future interest rate paths and will continue to make decisions at each meeting based on data.

New staff members predict that the overall inflation rate will be 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028; inflation forecasts excluding energy and food are 2.5%, 2.6%, and 2.3% respectively. Economic growth forecasts are 0.9% for 2026, 1.4% for 2027, and 1.5% for 2028. These figures represent a combination that is particularly challenging for policymakers: it will take longer to bring inflation back to target levels, while growth is not strong. Rising interest rates can suppress demand and inflation expectations, but they cannot directly increase energy supply; if tightening is too rapid, the cost of financing will first hit corporate investment, the real estate sector, and highly indebted member countries.

The signal of this interest rate hike is more important than the 25 basis points themselves.

A 25-basis-point increase is a common step, but what truly changes market perceptions is the European Central Bank's acknowledgment that the inflation path has risen again. Overall inflation is significantly affected by energy shocks, and core inflation forecasts are actually higher for 2027 than for 2026, indicating that policymakers are concerned that these pressures will persist longer through wages, services, and corporate pricing. As long as medium-term inflation expectations may become unanchored, central banks tend to act sooner rather than later, because waiting until all data are confirmed before tightening often means having to pay a higher cost in terms of interest rates and a greater economic toll.

However, the European Central Bank did not commit to a series of interest rate hikes as a continuous cycle. The official stance still relies on three key criteria: inflation prospects and their risks, underlying inflation trends, and the effectiveness of monetary policy transmission. Energy prices may reverse rapidly, wage negotiations and service sector inflation also tend to lag behind, and banks' response to interest rates varies from country to country. Therefore, the next meeting could either continue to tighten monetary policy or wait for more evidence before making a decision. To directly extrapolate this decision to a fixed number of hikes and a target interest rate exceeds the information provided in the announcement.

Balance sheet policies also remain contractionary. The combination of asset purchase programs and emergency purchase programs for the pandemic continues to decline, as the maturing principal is no longer reinvested. This means that even if policy interest rates are adjusted only slightly, the central bank's demand in the market is also decreasing, and the prices of long-term bonds are now determined more by private investors. For member states with tighter fiscal space, financing conditions depend not only on deposit interest rates but also on the premium on the duration of government bonds and the market's view on debt sustainability.

Enterprises in the eurozone will face two opposing forces. Rising energy and import costs increase operational pressures, while interest rate hikes raise the costs of borrowing and financing through bonds. Companies with ample cash and strong pricing power may be able to withstand these challenges, but small and medium-sized enterprises (SMEs) that rely on loans with floating interest rates and capital-intensive industries are more vulnerable. In the banking sector, the interest rate spread between deposits and loans may benefit in the short term, but if the economy weakens, leading to a decline in loan demand and an increase in default rates, profits will also be eroded. On the household front, differences in mortgage structures will result in significant disparities: borrowers with floating-rate mortgages or those whose mortgages have recently been repriced will feel the pressure more quickly, whereas holders of fixed-rate mortgages will be affected more slowly.

For the next step, it is necessary to bring together the three aspects of energy, wages, and credit.

The first point is energy. Conflicts in the Middle East affect oil and gas supply, shipping, and insurance costs, which can directly increase residents' bills, as well as be transmitted through the chemical, transportation, and manufacturing sectors. Central banks cannot produce energy; they can only prevent short-term shocks from turning into widespread price increases and wage hikes. If energy prices fall, inflation forecasts may be revised downward; if the shocks persist, central banks will pay more attention to whether long-term expectations will rise.

The second point is about wages and services. Commodity prices tend to reflect global supply and demand more quickly, whereas service prices are more influenced by local wages and demand. Even if energy prices fall, wage increases and service price hikes may still keep core inflation sticky. Subsequent labor agreements, unit labor costs, and surveys in the service sector will provide a better indication of internal pressures than overall monthly inflation. At the same time, the recovery of real income supports consumption, making it impossible for policies to simply rely on a natural cooling of demand.

Article 3 deals with credit transmission. Interest rate hikes only affect inflation by altering economic behavior through loans, bonds, exchange rates, and expectations. If banks rapidly raise lending standards, the economic slowdown may be faster than what models predict; if companies have sufficient cash or fiscal support to sustain their operations, the impact of policy changes may be slower. Therefore, the European Central Bank must observe the situation across different countries, industries, and borrowers, rather than relying solely on an average lending rate.

For market participants, the most prudent conclusion is not to bet on a certain interest rate target, but to acknowledge that the range of policy options has widened. The European Central Bank has already shown through its actions that it believes current inflation risks warrant tighter constraints; at the same time, the annual growth forecast of 0.9% serves as a reminder that the costs of continuing to raise interest rates are also accumulating. Future data on inflation, wages, credit, and growth will all change the relative weights of these factors. The path set by the September decision is clear, but the subsequent pace remains an open question.