Page last updated at 20:50 GMT, Thursday, 3 July 2008 21:50 UK

Eurozone rates increase to 4.25%

Jean-Claude Trichet
ECB president Jean-Claude Trichet had hinted rates would rise

Eurozone interest rates have increased for the first time in a year in an attempt to control inflation, which is at record levels.

Rising food and fuel costs encouraged the European Central Bank (ECB) to put its key rate up from 4% to 4.25%.

Inflation in the eurozone hit an annualised rate of 4% this week, the highest rate since official records began in 1996.

The move comes despite concerns that the eurozone economy is slowing.

European markets had expected the rate rise - but shares rose in reaction to comments by ECB president Jean-Claude Trichet that were interpreted as a signal that this could be a one-off rate rise rather than the first of a series.

"The monetary policy stance after today's decision will contribute to achieving our objective of price stability," Mr Trichet said.

"I have no bias and we are never pre-committed."

The statement following the rise was "nowhere near" as hawkish as most had expected, said Henk Potts, a strategist at Barclays Stockbrokers.

Weaker dollar

There are concerns that higher interest rates could cause the economy to slow further.

Figures released earlier on Thursday showed that the service sector of the eurozone economy, which ranges from banks to hotels, had failed to expand for the first time since June 2003.

The eurozone Purchasing Managers Index fell to 49.1 in June, compared to 58.3 in the same month in 2007. A measure below 50 indicates the sector is contracting.

The slowdown in Spain's service sector was particularly marked, leading some to suggest that Spain is heading for a recession.

The rise in eurozone interest rates had been expected to push oil prices higher.

Dr Chakib Khelil, president of the oil producers' group Opec told the BBC on Wednesday that an interest rate rise would cause the dollar to weaken further against the euro, thus making oil a more attractive investment.

Oil prices hit record levels on Thursday in anticipation of the rate rise, with Brent crude topping $146 a barrel for the first time.

Meanwhile, the dollar had sunk to a two-month low against the euro though later made ground.

Elsewhere in Europe, Sweden's central bank also put its main lending rate up to 4.5% from 4.25% in a bid to combat inflation.

"Inflation has risen substantially and is at its highest level since the mid-1990s," the Swedish Riksbank said in a statement.

It also signalled that more interest rate rises could be on their way if world oil and food prices continued to rise.

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