ECB raises lending rate by 0.25%

The cost of servicing a mortgage rose again yesterday following the decision by the European Central Bank (ECB) to increase its key lending rate by one-quarter of a percentage point. The latest increase, the seventh since December 2005, brings the ECB's key "main refinancing rate" to 3.75 per cent, writes Marc Coleman, Economics Editor

Analysts said yesterday that rates could rise again this year, possibly to more than 4 per cent. Opposition parties said the rise would put a severe burden on families.

For a typical mortgage of €250,000, the increase adds €35 per month to the cost of servicing that mortgage, or about €420 per year. If repeated in June, this additional cost would rise to more than €800.

In updated economic forecasts also published yesterday, the ECB said it expected the euro-zone economy to grow more strongly than expected this year and inflation to be slightly higher than earlier predicted.

ECB president Jean-Claude Trichet said the forecasts justified the ECB's decision to raise rates and added that interest-rate levels remained low by historical standards. "After today's increase, given the favourable economic environment, our monetary analysis continues to be on the accommodative side, with the key ECB interest rates moderate," Mr Trichet said.

The ECB expects the euro-zone economy to grow by between 2.1 per cent and 2.9 per cent this year and by between 1.9 per cent and 2.9 per cent in 2008. While forecasting the rate of inflation to stay close to its 2 per cent target this year, it will rise to between 1.4 and 2.6 per cent in 2008, and Mr Trichet said the ECB may have to act in a "firm and timely manner" to ensure it did not exceed 2 per cent "over the medium term".

According to the ECB's monetary analysis, the closely watched "M3" measure of money supply grew at an all-time record rate of 9.8 per cent last January. This has added to the bank's fears that inflationary pressures are building up.

Mr Trichet's remarks were taken as a signal that interest rates may rise further. If a June increase does occur, it is likely to be signalled by the first May meeting of ECB's governing council, which is scheduled to take place in Dublin.