ECB raises rates by 0.25 percentage points

The European Central Bank has raised interest rates by a quarter of a percentage point — less than previous increases — in a sign that eurozone borrowing costs may soon reach their peak.

The ECB’s move on Thursday, which mirrors the US Federal Reserve’s quarter-point rate rise the previous day, takes the benchmark deposit rate to 3.25 per cent in the seventh consecutive increase since mid-2022.

Central banks on both sides of the Atlantic have dramatically raised borrowing costs since last year in response to a surge in inflation. But, with price pressures having fallen from their peak and a credit crunch looming, many economists think the rate-tightening cycle is nearing its end.

Christine Lagarde, ECB president, is likely to be asked at a press conference later on Thursday if she expects further rate rises. Investors are pricing in a couple more quarter-point moves by the ECB to lift its deposit rate to 3.75 per cent — matching Its highest-ever level in 2001.

This compares with benchmark rates of above 5 per cent in the US and 4.25 per cent in the UK.

Eurozone inflation remains well above the ECB’s 2 per cent target after rising for the first time in six months to 7 per cent in April, up from 6.9 per cent in March.

However, after stripping out energy and food prices, core inflation dipped for the first time in 10 months to 5.6 per cent in April. This provided rate-setters with encouragement that higher borrowing costs are starting to erode economic activity and ease underlying price pressures.

Rising interest rates have contributed to turmoil in the US banking sector, which continued this week with the seizure of First Republic by US regulators and the sale of the lender’s main assets to JPMorgan Chase.

While eurozone banks have so far been more resilient, they told the ECB in a survey published this week that credit conditions and loan demand tightened at the fastest pace since major financial crises more than a decade ago.

Economists believe such factors will cool inflation, making fewer rate increases necessary.