ECB raises rates 25 bps to 3-year high of 2.5 pct

FRANKFURT, Mar 2 (Reuters) The European Central Bank raised interest rates by 0.25 percentage points on Thursday to 2.5 per cent, the highest level in nearly three years, to counter inflationary pressures in a strengthening economy.

The 0.25 percentage point rate hike was the second ECB credit tightening in three months. It was universally expected in financial markets, especially after Germany reported on Thursday that retail sales jumped in January.

The data followed surging sentiment surveys and provided long-awaited evidence that the euro zone's largest economy is poised for a consumer revival, the missing element in this sluggish recovery.

ECB President Jean-Claude Trichet had already said that growth in the 12-nation region was broadening and strengthening while inflation dangers persist, and that market expectations for the March hike were ''perfectly sensible''.

Trichet holds a news conference at 1330 GMT (1900 IST) to explain the Governing Council's rate decision, when he is also due to release updated staff projections for euro zone growth and inflation in 2006 and 2007.

Analysts said they will scrutinise these forecasts along with Trichet's comments for clues on future rate increases.

So far, ECB policymakers have given little guidance beyond March, saying only they will respond to economic data as needed to ensure the ECB delivers on its mandate of getting consumer price inflation just below 2 per cent. Currently the rate is above target at 2.3 per cent.

The ECB also said it lifted rates on its marginal lending facility, used in emergencies by banks short of overnight cash, to 3.50 per cent, and its deposit facility, which accepts excess cash from the market, to 1.50 per cent.

REUTERS SD RN1855