ECB raises interest rate to 3.25%

UK, US and and European central banks have all been raising interest rates

Central banks in the US, eurozone and UK have all raised interest rates in recent months. EPA

The European Central Bank has raised its key interest rate by a quarter-point in an effort to curb inflation.

The ECB, as it increased the key rate to 3.25 per cent, said the inflation outlook remained “too high for too long”.

The US Federal Reserve on Wednesday raised interest rates by 25 basis points, its 10th consecutive increase, and indicated a possible pause in future meetings.

The latest action brings the Fed's interest rates to the target range of between 5 per cent and 5.25 per cent.

The Bank of England base rate has risen this year and is at 4.25 per cent.

The London bank is charged with keeping the rate as close to two per cent as possible, but some economists fear there are more rises to come.

The ECB, central bank for the 20 countries that share the euro, has now raised rates by 375 basis points since last July.

The May increase is smaller than the three consecutive 50 basis point increases that came before it. It comes into effect from May 10.

“The inflation outlook continues to be too high for too long,” the ECB said.

“In light of the ongoing high inflation pressures, the governing council today decided to raise the three key ECB interest rates by 25 basis points.

“Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting.”

The decision comes after euro zone banking data showed the biggest drop in loan demand in over a decade, which suggests previous rate rises are working their way through the economy and that ECB policies are restricting growth.

Despite the ECB's tightening, consumer prices in the region rose in April after five consecutive months of declines, edging up to 7.0 per cent on an annualised basis from 6.9 per cent in March.

But core inflation fell slightly in April, its first drop for months and a potential turning point that gave ammunition to those calling to slow rate increases.

With inflation beneath its October peak, analysts believe the ECB is contemplating the end of its unprecedented period of monetary tightening, but they still expect that there are two more steps of 25 basis points to come.