The European Central Bank raised interest rates for the first time in more than a year today, in a widely expected quarter percentage-point move which took the benchmark rates to 4.25 per cent, the highest level since September 2001.
The ECB acted after euro zone inflation accelerated to 4 per cent year-on-year last month, more than double the bank's medium-term goal.
European Central Bank President Jean- Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 per cent.
"Today's decision will contribute to achieving our objective," Mr Trichet told a press conference in Frankfurt this afternoon.
If, as is likely, the interest rate rise is passed on to mortgage holders by lenders it would see average monthly repayments on a 20-year mortgage rise by roughly €15 for every €100,000 borrowed. For those with a 30-year mortgage term, the increase would be approximately €16 per €100,000.
"This move is largely a symbolic gesture aimed at getting inflation expectations down," said Dario Perkins, European economist at ABN Amro.
"I get the feeling that markets are starting to question the inflation credibility of the (US) Federal Reserve and the Bank of England. The signal the ECB are sending today is that they are serious about their anti-inflation mandate," he added.
"Of course, that doesn't rule out further moves. It will depend on what happens to inflation and, more importantly, inflation expectations," he said.
Taoiseach Brian Cowen warned against talking the economy into recession after this morning's move.
“People are talking about Armageddon-type scenarios. It really needs to stop. We need to ensure that we maintain confidence in our own ability to manage our affairs and to deal with these issues which every other country has to deal with as well,” he said.
The euro fell versus the dollar and short-dated Bund yields tumbled after markets reckoned that the ECB would not raise rates again in the short term.
Oil prices hit a record above $145 per barrel and rising inflation expectations underline the ECB's fear of a damaging wage-price spiral.
Economists are keen to know if this marks the start of a campaign of rate rises, despite growing signs of a slowdown in the euro zone economy.
Several ECB policymakers have said they do not plan a series of increases and most economists see little further scope for tightening as the growth outlook deteriorates.
But markets are betting on rates hitting 4.5 per cent by the year-end, and some traders had even seen a chance of a half percentage point move today.