The euro vaulted to new record highs this morning after a hawkish European Central Bank held interest rates and dug in its heels against any early cuts despite growing fears over the single currency’s strength.

The ECB hardline stance was underlined by Jean-Claude Trichet, its President, as it raised its forecasts for likely inflation rates during this year and next, while cutting its projections for eurozone growth.

The Frankfurt-based central bank now expects that if it were to cut eurozone interest rates as markets expect, to about 3.25 per cent next year from their present 4 per cent level, eurozone inflation would average 2.9 per cent this year, rather than the 2.5 per cent the ECB previously projected.

The forecast also showed that, based on the markets’ rates expectations, inflation in 2009 would be 2.1 per cent, up from the previous projection of 1.8 per cent, and stuck above the ECB’s target of “close to, but below 2 per cent”.

“The latest information has confirmed the existence of strong, short-term upward pressure on inflation,” Mr Trichet said. He made clear that the ECB was in no mood to fulfil market predictions of rate reductions or bow to political pressure for action to bolster European growth. Curbing inflationary price pressures was the central bank’s focus, he insisted.

“We emphasise that maintaining price stability in the medium-term is our primary objective, in accordance with our mandate,” he said. He stressed that this was the “highest priority of the [ECB’s] Governing Council”.

The ECB conceded in its forecasts that eurozone growth was now likely to be weaker than it previously hoped. It now projects growth in the 15-nation zone will be 1.7 per cent this year, down from its previous 2 per cent expectation.

In 2009, the growth forecast was cut to 1.8 per cent, from 2.1 per cent previously.

Despite demands for the ECB to underpin growth with lower borrowing costs, Mr Trichet made clear that the decision to leave rates on hold yesterday was taken unanimously by the Governing Council. He rejected claims that the ECB was jeopardising eurozone growth prospects.

“There is no contradiction between price stability, and growth and job creation,” he said.

Economists said that the ECB’s tough stance suggested that, while it was likely to eventually cut eurozone interest rates, any move was unlikely before June at the earliest.

The hardline comments from Mr Trichet and markets’ expectations that interest rate cuts are not imminent added to upward pressure on the euro.

In its latest steep gains, the euro climbed to another all-time high of $1.5372 as the dollar remained under intense pressure on foreign exchange markets.

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