Eurozone rates on hold at 4.25%

The ECB faces stubbornly high inflation and faltering economic growth

The European Central Bank (ECB) has left interest rates unchanged at 4.25% amid faltering economic growth and rising inflation in the eurozone.

ECB President Jean-Claude Trichet weighed up rising inflation and more evidence that some eurozone nations are on the brink of recession.

A report by ECB staff predicted higher-than-expected inflation and lower economic growth this year and next.

Analysts said they expect rates to remain on hold for the rest 2008.

Earlier on Thursday, the Bank of England left the cost of borrowing in the UK unchanged at 5%.

Inflation threat

Inflation remains the key concern for Mr Trichet as rising food and energy prices have pushed inflation to 3.8%, well above the ECB's informal 2% target.

There are also concerns that wage demands could add to the bank's woes.

We have upside risks to price stability, we are clear on that. We have only one needle in our compass which is delivering price stability Jean-Claude Trichet, President, European Central Bank President

"We have upside risks to price stability, we are clear on that. We have only one needle in our compass which is delivering price stability," Mr Trichet said at his press conference after the decision was announced.

But the ECB chief also faces the prospect of economic growth in the region grinding to a halt.

Figures from the European Union showed the eurozone economy shrank 0.2% in the second quarter of the year compared with the previous quarter.

Stagnant eurozone

There are increasing fears that the region could be entering a recession - or two successive quarters of contraction.

European confidence was also sapped by comments from the chairman of eurozone finance ministers.

Jean-Claude Juncker said he expected growth to slow significantly this year and argued that the euro was overvalued.

His comments sent the euro falling 0.8% against the dollar to $1.4377, after touching a low of $1.4376.

The OECD recently said that it expected growth in the three largest eurozone economies - Germany, France, and Italy - to be broadly flat for the rest of the year.

However, Mr Trichet insisted bank's outlook for monetary policy and the economy had not changed significantly since last month's meeting.

Worldwide problem

Analysts said policymakers around the world were grappling with the threat of inflation and slowing growth.

"Inflationary pressures are doubtless keeping the minds of the central bankers highly focused but we do need to bear in mind that oil prices have fallen dramatically over the last six to eight weeks," said CMC Markets analyst James Hughes.

Sweden's central bank raised borrowing costs on Thursday for the third time this year to tackle rising inflation.

Rates rose by a quarter of a percentage point to 4.75%, despite economic growth coming to a standstill in the second quarter.

Earlier in the day, Indonesia's central bank increased rates to 9.25% to combat double-digit inflation.

Some analysts believe these rate hikes may be the last in 2008 as price pressures may have peaked.