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 decision 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 rates 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.

In another move intended to increase borrowing costs, the ECB said it would buy fewer bonds to replace maturing securities as it seeks to shrink its balance sheet. The bank has built up huge bond holdings since 2015 and now intends to cut the stockpile by €25bn a month from July, compared with the current pace of €15bn.

The euro weakened by less than 0.1 per cent against the dollar to $1.105 while the yield on interest rate-sensitive two-year German bonds slipped 0.07 percentage points to 2.6 per cent.

Following a meeting of its governing council in Frankfurt, the ECB said “the inflation outlook remains too high for too long” but confined itself to repeating that it would continue to take a “data-dependent approach” to future policy decisions.

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.

“Headline inflation has declined over recent months, but underlying price pressures remain strong,” the ECB said, adding that it would raise rates enough to hit its inflation target and keep them there “for as long as necessary”.

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.

Europe’s region-wide Stoxx 600 index barely budged following the ECB’s move, 0.9 per cent lower on the day.

Additional reporting by George Steer