The euro vaulted to record highs yesterday after a hawkish European Central Bank (ECB) held interest rates and dug in its heels against any early cut, in spite of growing eurozone fears over the single currency’s strength.

Hardline comments by Jean-Claude Trichet, the President of the ECB, and markets’ expectations that interest-rate cuts are not imminent added to upward pressure on the euro.

In its latest steep gains, the euro hit another record high of $1.5372 as the dollar remained under intense pressure on foreign exchange markets. The pound also gained against the embattled greenback, breaching $2 for the first time this year, to hit $2.0066.

The ECB raised its forecasts for likely eurozone 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, so that they fall to about 3.25 per cent by 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 markets’ rate 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”.

Mr Trichet said: “The latest information has confirmed the existence of strong, short-term upward pressure on inflation.”

The ECB’s President made clear that it was in no mood to fulfil market forecasts of rate reductions nor to 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 emphasised that this was its “highest priority”.

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 at 1.7 per cent this year, down from a previous 2 per cent expectation. The 2009 growth forecast was cut to 1.8 per cent, from 2.1 per cent.

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

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