ECB raises rates to 2.50%: wages are stagnant and profits are rising

Executive summary

• The decision. A 25 basis-point increase for the second time in this cycle: the deposit facility to 2.50%, the main refinancing operations to 2.65%, and the marginal lending facility to 2.90%, effective 16 September. With this move, the bank has erased in three months all the cuts that took a year.
• The statement. One sentence carries the full weight: the conflict in the Middle East “continues to generate inflationary pressures, and inflation is likely to remain well above target for an extended period”. This is the first time that inflation remaining above target has been framed as “extended” rather than transitory.
• The projections. Headline inflation at 3.0% in 2026, then 2.5% and 2.1%. An upward revision for 2027 and 2028 of 0.2 and 0.1 percentage points from June. More importantly, core inflation is expected to rise in 2027 to 2.6% — above 2026, after two years of increases.
• The figure that settles the debate. The projections themselves assume three-month EURIBOR at 3.0% in 2027 and 2028 — an upward revision of 0.3 percentage points from June. In other words, the inflation path returning to target at end-2027 is conditional on further increases, not stopping at 2.50%.
• The press conference. Lagarde described the decision as “a no-brainer”, disclosed that the Council did not discuss the future rate path at all, and stripped the neutral-rate range of any signalling value (“largely a theoretical concept”). She then said data after the projections’ cut-off date point to growth higher than stated in them.
• The mechanism left unstated. Wages are not responding to the shock — and the statement says so literally. Compensation per employee fell to 3.3%, and unit labour costs to 2.6% from 3.5%. By contrast, unit profits jumped from 0.3% to 2.2%. The shock is passed through via margins, not wages.
• Our measure of tone. The EL7 tone index reached its peak this year at the April hold (41), not at either increase. The two increases carry the calmest wording in 2026: 23 in June and 29 today. The Council issued its strongest warning when it did not move.