European Central Bank eyes up rate hike

With financial markets still suffering the fallout of the US sub-prime mortgage crisis, countermeasures are being considered on the other side of the Atlantic.

Indications from the European Central Bank (ECB) suggest that there is a readiness in Frankfurt to raise interest rates in order to hem in inflation.

Response to market volatility from the US Federal Reserve was to cut interest rates by 0.5 per cent, freeing up credit and giving investment a boost, but reining in inflation is the key EU concern.

Jean-Claude Trichet, the Frenchman at the head of the ECB, said the bank's governing council was "ready to take a decision to moderately augment the present level of interest rates".

Having remained at around two per cent for more than two years, the European rates are now seen to require a hike in response to the inflation provoked by high oil prices.

With oil reaching as high as $84 per barrel in recent weeks, inflationary concerns have led many investors to buy gold, pushing the price of the precious metal to record highs.

In what may be the first of several rate hikes, gold is likely to remain a safe anti-inflationary hedge until the dust settles on the summer's financial turmoil.