Mortgage rates will rise again next week, following the latest increase from the European Central Bank - the seventh in less than a year.
Official interest rates now stand at 4.75 per cent and are expected to rise to above 5 per cent in the coming months, perhaps before Christmas.
ECB president Mr Wim Duisenberg said after the meeting of the bank's governing council yesterday that the increase in oil prices and the weakness of the euro against other currencies were the main factors behind the decision to raise rates.
He also stressed that the ECB wanted to ensure the fall in value of the euro and higher oil costs did not lead to a "permanent" jump in inflation as people began to factor it into wage and price expectations.
ECB officials have said they are concerned higher oil costs will feed through to the wider economy, leading to rising pay claims. According to the International Monetary Fund, higher oil costs could shave half a percentage point off world economic growth. There was speculation the rate rise could be a back-up to the recent intervention in the euro. Mr Duisenberg denied any link, though he did say the moves were "consistent" and that the ECB would continue to monitor [exchange rates] closely" and act upon them "as appropriate".
"They had to back up the intervention with a fundamental move to make it all credible," said Mr Aziz McMahon, economist at Ulster Bank. He added that the chances of further intervention were rising. "This is designed to give the euro another shot in the arm," said Mr Frank Schroder, an economist at HSBC Dusseldorf.
On the markets, the move gave the euro a boost only briefly before it fell below the level at which intervention occurred as traders tested the ECB's resolve. They also pointed to fears that higher borrowing costs could choke economic expansion.
Growth is already showing signs of slowing and confidence among executives and consumers in the euro zone fell to a nine-month low in September. Mr Duisenberg claimed that the decision to increase interest rates would help to maintain strong growth by keeping inflation under control. But some analysts in Frankfurt were speculating yesterday that the ECB chose to increase rates now because they feared that economic growth would slow down later this year, making an interest rate hike more difficult to justify.
"I don't think it was an accident that the markets were not prepared in advance this time," said Mr Michael Holstein of DG Bank.
If growth in the euro zone holds up, the narrowing gap between US and euro zone rates could enhance euro assets.
The gap with the Federal Reserve has been narrowed to 1.75 percentage points from 2.5 at the start of the year.
The ECB's move surprised market analysts, most of whom had expected the rate rise in November.
