Cost of borrowing goes up in US

America's central bank, the Federal Reserve, last night raised interest rates for the fourth time in six months and warned US consumers and businesses to expect further increases in borrowing costs.

In an expected move, the Fed's open market committee voted unanimously for a quarter-point rise to 2% in its fed funds rate but gave an assurance that it would adopt a cautious approach to further policy tightening.

The US dollar - which at one stage yesterday dropped to a record low against the euro - ended only slightly up in the wake of the decision, with Wall Street convinced that the Bush administration sees a cheaper currency as a cure for America's trade deficit. The euro's modest dip was blamed on Italy's economy minister Domenico Siniscalco who said there was talk of central banks intervening to curb the currency's strength.

In a statement announcing its decision, the Fed said interest rates - which were cut to a 40-year-low of 1% in an attempt to revive the US economy after September 11 - were still too low for an economy that was shrugging off the recent rise in oil prices.

"The committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

"Output appears to be growing at a moderate pace despite the rise in energy prices, and labour market conditions have improved. Inflation and longer term inflation expectations remain well contained."

Wall Street analysts said that provided there was no sudden downward lurch in the economy over the next few weeks, the Fed was likely to raise interest rates at its meeting next month.

The Fed said it saw the risks to sustainable growth and inflation over the next few quarters to be roughly equal. "With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the committee will respond to changes in economic prospects as needed to fulfil its obligation to maintain price stability."

Jason Bonanca, foreign exchange analyst at Credit Suisse First Boston in New York, said: "There's no suggestion that [the Federal Reserve] is going to pause. It's going to be pretty much 25 points at a clip until further notice. The thing that makes me say that is that part about the labour market improving rather than saying the labour market improved modestly."

The decision came several hours after the US government said America's trade gap narrowed to $51.56bn (£27.9bn) in September, beating economists' expectations for a $53.5bn shortfall. That, coupled with Mr Siniscalco's remarks and the belief that the Fed would increase rates, also helped the dollar to come off lows of $1.30 against the euro.

The move had little effect on the Dow Jones index which closed virtually unchanged at 10385.