WASHINGTON: The US central bank has raised interest rates, in spite of the fear that the move could add to financial turmoil after a string of bank failures, BBC reported.

The Federal Reserve increased its key rate by 0.25 percentage points, calling the banking system “sound and resilient”, the report said.

It has, however, warned that fallout from the bank failures may hurt economic growth in the months ahead.

Two US banks – Silicon Valley Bank and Signature Bank – collapsed this month, buckling in part due to problems caused by higher interest rates, according to the BBC report.

There are concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable, it said.

Stating that banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses, it said that falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them.

Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control.

Last week, the European Central Bank raised its key interest rate by 0.5 percentage points.

Federal Reserve chairman Jerome Powell said the Fed remained focused on its inflation fight.

He described Silicon Valley bank as an “outlier” in an otherwise strong financial system.

But he acknowledged that the recent turmoil was likely to drag on growth, with the full impact still unclear.

(Inputs from BBC)