Euro-zone interest rates rose to their highest level in five years yesterday as the European Central Bank (ECB) increased the cost of borrowing to 3.5 per cent.

The euro sold for $1.3277 in early currency trading on Friday and was valued at ¥153.96 and 67.69p sterling, while the pound traded at $1.9616.

"Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted," said ECB president Jean-Claude Trichet. 

"The governing council will monitor very closely all developments so that risks to price stability over the medium term do not materialise."

Analysts said that the overall growth of the EU economy made a further rate rise in the early months of 2007 likely.

Almost three quarters of economists polled after the ECB's announcement said that rates would rise to 3.75 per cent by the end of March, an increase from 68 per cent last week.