Inflation fears drive up eurozone rates

Signs of inflationary pressure in the 11 member countries of the eurozone prompted the European Central Bank to raise borrowing costs yesterday for the second time in six weeks.

The ECB raised all three official interest rates by 0.25%, taking its main refinancing rate to 3.5%. This is the first time the bank has changed rates at a meeting without a scheduled press conference, but the move had been well telegraphed and the markets were unmoved by the announcement.

"The reasons were fairly obvious even without a press conference," said Ken Wattret at BNP Paribas. "With growth accelerating, inflation pressures rising and the euro weak, policy is seen to be too accommodating."

The ECB said it was concerned about the rapid growth in the money supply and rising inflation pressures. "Most indicators and forecasts point to increasing upward pressures on consumer price inflation over the medium term," the bank warned.

Data released earlier this week showed Ireland's inflation hit an 11-year high of 4.3% in February, while Spain's rate reached a three-year peak of 3%, and Finland's rose to 2.7%.

Most economists expect inflation in the eurozone to reach 2.1% when the February figure is announced on Monday, taking the rate clearly above the ECB's 2% ceiling for inflation for the first time.