Eurozone interest rates raised

The European Central Bank today raised interest rates by 25 basis points to 2.75%, despite fears that higher borrowing costs would hurt recovery.

The ECB's decision to raise rates to a three-year high had been expected because of the pickup in the eurozone. Some analysts had expected it could boost rates by half a percentage point.

Inflation has been accelerating above the ECB's target, economic growth is near its long-term trend and retail sales are growing. Data released yesterday showed sales in the 12-country zone rising by 1.4% in April.

European governments will be relieved that the ECB kept the rate rise to a quarter of a percentage point, having feared a big rise in rates that could have pushed the euro higher against the dollar and hit exports.

Rates in the eurozone are now at their highest level since early March, 2003. Analysts believe the ECB will raise them to 3% in August, and to 3.25% later in the year.

"Although, it is very possible that the ECB could raise interest rates further still, we anticipate that it will return to the sidelines at the end of the year for an extended period," Howard Archer, of the consultancy Global Insight, said.

"This is because we anticipate that eurozone growth will lose some momentum towards the end of 2006 and in 2007 in the face of a forecast marked appreciation of the euro, modestly softer global growth, persistently very high oil prices, and the higher interest rates."