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Homeowners face pain as ECB raises rates by 0.25pc

Mortgage holders are set for more pain after the European Central Bank (ECB) raised interest rates today.

The anticipated 0.25pc increase will add over €20 a month to an average €200,000 mortgage.

Many variable mortgage holders are already being stung on the double because their banks are raising rates separately from the ECB.

And the increase will also cause more expense for Irish banks that are depending on loans from the ECB for survival.

Earlier economists said the rate would come as the ECB tackles eurozone inflation, at 2.7pc, which is well above the 2pc target favoured by the bank.

This inflation is being driven by European economic powerhouses like Germany and France while peripheral countries like Ireland, Greece and Portugal, which are the subject of bailout loans, struggle with the consequences of higher rates during recessionary times.

The bank has hiked rates once already this year, raising its main rate to1.25pc from an historic low of 1pc- the first rise in two years.

Last month, the bank held interest rates steady but ECB president Jean-Claude Trichet since hinted that a rise was imminent when he said he would exercise "strong vigilance" over price pressures (inflation), a phrase that usually means a rate increase.

“The ECB will almost certainly increase interest rates by 25 basis points . . . as announced last month and confirmed by ECB officials since.

“We think that now is not the time to raise rates," said Ernst & Young senior economic adviser Marie Dirron, ahead of the rate rise.

"Moreover, with the spectre of a disorderly restructuring of Greek debt looming over the eurozone's future, the risks to the growth (and hence inflation) outlook are so skewed to the downside, that prudent monetary policy management would suggest waiting before raising rates.”

Meanwhile, the Bank of England kept its key rate at a low of 0.5pc as worries about the weak recovery outweighed any concern about above-target inflation.

The no-change decision had been unanimously forecast by 60 economists in a Reuters poll.

It came as no surprise to markets that are not fully pricing in a British rate hike until mid-2012.