AIB has become the first financial institution to raise interest rates after announcing higher lending and deposit rates.

The Republic's biggest bank has increased its standard variable home loan rate by 0.2 of a percentage point from 3.3 per cent to 3.5 per cent. The increase is slightly less than the 0.25 of a percentage point rise in European Central Bank rates last week and will apply to its customers from close of business on Monday.

The higher mortgage rate will add about €16 a month to the cost of a €150,000 mortgage taken out over 25 years. The average monthly repayment will rise to about €750. The monthly cost of a €200,000 mortgage over the same period will increase by about €21 to €1,273.

The bank's tracker mortgage rates - which are linked to the ECB rate - will automatically increase by the full 0.25 of a percentage point. Overdraft rates for business and personal customers will also rise by 0.25 of a percentage point and a similar increase will apply to A and AA loans offered by the bank. Its Masterplan rate is being reduced from 9.45 per cent to 8 per cent.

AIB's deposit interest rates are also set to increase. Customers with variable deposit rate Special Savings Incentive Accounts (SSIAs) will be offered a rate of interest of 2.25 per cent, an increase of 0.25 of a percentage point. Its online savings rate increases by 0.25 of a percentage point to 3.25 per cent.

AIB is the first to pass on the higher ECB rate to its customers. Yesterday, the other big lenders, including Bank of Ireland and Irish Life and Permanent, said they were continuing to monitor their rates of interest.

The rate rise is the first since October 2000. Bank of Ireland, its subsidiary ICS Building Society as well as IIB Homeloans increased their fixed rates last month in anticipation of a rate hike. Northern Rock has said it will pass on most of the rate increase to its deposit customers from January.

The ECB increased its rate from 2 per cent to 2.25 per cent and has not ruled out further increases next year. Some economists expect that rates will rise to up to 2.75 per cent in 2006.

The ECB has indicated its readiness to raise interest rates to combat inflation in the euro zone.