ECB increases interest rates

The European Central Bank today brushed aside concerns over a fragile economic recovery to raise interest rates for the first time in five years.

Despite European governments' fears that dearer money would threaten recovery in the eurozone, the ECB lifted borrowing costs by 0.25 percentage points to 2.25%.

The move had been widely expected since the ECB president, Jean-Claude Trichet, said two weeks ago that the central bank was ready to "moderately augment" interest rates.

Today's rise comes amid a slow improvement in the 12-member eurozone and growing inflationary concerns over high energy prices and cheap credit.

The ECB last raised rates in October 2000, and has not changed them since they were cut to 2% in June 2003.

After its November rate-setting meeting, the bank said inflation dangers had risen, especially from higher oil prices that could feed into higher wages and prices.

Consumer prices have risen by more than the ECB's price stability ceiling of 2% every year since 1999, and again look set to top that level in 2005 and 2006.

In its semi-annual forecast, the European Banking Federation - which represents the interests of more than 4,500 banks - said it could see no justification for a rate hike.

"We appreciate the need for vigilance in protecting against inflation," Alejandra Kindelan, the head of the Federation's economic and monetary affairs committee, told Reuters before the rate rise.

"But we do not see the clear sign of a lasting revival in domestic demand or substantial price effects from higher raw material costs, which could justify an increase in rates."