Eurozone rates on hold at 4.25%

The ECB faces the twin threat of rising inflation and slowing economic growth

The European Central Bank (ECB) has kept interest rates unchanged at 4.25% amid signs of slowing economic growth.

ECB President Jean-Claude Trichet said growth in the 15-nation bloc had been "particularly weak" in mid-2008.

But he stressed that against the deteriorating outlook, the ECB's priority is to maintain price stability as inflation reaches record levels.

Earlier on Thursday the Bank of England opted to keep rates unchanged at 5%. US interest rates are currently 2%.

Warning on wage demands

Mr Trichet said that eurozone inflation, which has surged above 4%, was likely to remain above the ECB's 2% target for some times as a result of sharp increases in food and energy prices.

"Annual inflation rates are likely to remain well above levels consistent with price stability over a protracted period of time and risks to price stability in the medium term remain on the upside," he said.

He warned that spiralling wages to cope with the high costs of food and fuel will only add to further inflationary pressures and said the ECB would monitor the situation.

Earlier this month, German airline Lufthansa agreed an inflation-busting 5.1% pay rise for ground staff to end a five-day strike over pay.

In a bid to persuade workers that the current high rate of inflation will pass, the ECB raised rates in July - the first increase in a year.

Policy dilemma

Central banks worldwide are facing the twin threats of accelerating inflation - caused by rising energy and food costs - and slowing economic growth.

While tackling inflation remains a key concern of the ECB, analysts have pointed to recent eurozone figures highlighting how much the area's economy has slowed.

The eurozone's services sector contracted at its fastest pace for five years in July, while separate figures showed retail sales for the region in June dropped by 3.1% year-on-year - the biggest fall since 1995.

At the same time, recent data has highlighted the extent of inflationary pressures facing policymakers.

Eurozone inflation increased to 4.1% in the year to July, the highest rate since the measurements began in 1997.

Jennifer McKeown, an economist at Capital Economics said: "With the eurozone economy already at risk of recession, we still expect rates to fall further than markets currently anticipate next year".