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Eurozone battles record inflation

Jaimie Kanwar

The ECB has raised Eurozone interest rates for the first time in a year.

Rising food and fuel costs encouraged the European Central Bank (ECB) to put its key rate up from 4% to 4.25%. Inflation in the eurozone hit an annualised rate of 4% this week, the highest rate since official records began in 1996.

The move comes despite concerns that the eurozone economy is slowing. European markets had expected the rate rise - but shares rose in reaction to comments by ECB president Jean-Claude Trichet that were interpreted as a signal that this could be a one-off rate rise rather than the first of a series.

In a statement after the rise, Mr Trichet commented: "It is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored. The monetary policy stance after today's decision will contribute to achieving our objective of price stability".

There are concerns that higher interest rates could cause the economy to slow further. Figures released earlier on Thursday showed that the service sector of the eurozone economy, which ranges from banks to hotels, had failed to expand for the first time since June 2003.

Bank of America economist Holger Schmieding added: "With companies and households being squeezed between today's increase in borrowing costs and ever-higher energy bills, a genuine recession -- although still unlikely - cannot be fully ruled out anymore".