Eurozone interest rates rise to highest level in five years

The European Central Bank lifted interest rates to their highest level for five years yesterday and left the door open for further rate increases next year.

It raised its main rate to 3.5 per cent but said this was still "accommodative" - economists' code for stimulating growth and inflation rather than restraining it.

"Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted," Jean-Claude Trichet, the ECB's President said after the decision.

"The Governing Council will monitor very closely all developments so that risks to price stability over the medium term do not materialise."

However, he appeared to rule out a rate rise in February, saying that would be the "wrong interpretation", but that the ECB was ready to act at any time.

The euro was little changed against the dollar as analysts said the ECB was now prepared to take a more ad-hoc approach rather than committing itself to further rises.

Jonathan Loynes, a senior economist at Capital Economics, said: "The upshot is that, while the path of rates will now depend more heavily on the incoming data, the continued momentum of the eurozone economy suggests they will rise at least once more early next year."

In a Reuters poll conducted after the news conference, analysts strengthened their view there will be a further rate rise in 2007. Three-quarters of economists predicted ECB rates at 3.75 per cent by the end of March, up from 68 per cent last week. A narrow majority now see rates rising to 4 per cent in 2007.

M. Trichet's rate warning came despite favourable new ECB staff projections that forecast inflation in 2007 at 2 per cent and 1.9 per cent in 2008, down from 2.2 per cent expected for 2006.

These levels would mean the ECB achieves its goal of getting inflation to just below 2 per cent for the first time since 1999.