The European Central Bank has announced an increase of a quarter of a percentage point in interest rates to bring its key rate up to 4%, and has hinted that there could be further increases, though not next month.
The news sent European stock markets sharply lower.
Banks and building societies are expected to move quickly to pass the widely expected rate increase on to borrowers and savers.
This is the eighth increase in interest rates since December 2005 and it brings mortgage rates to their highest level for almost six years.
At a news conference ECB president Jean-Claude said the bank's monetary policy was still on the 'accommodative' side and that today's increase was intended to counter inflation risks.
A reference to an 'accommodative' stance is seen as a signal that rates are not yet at their peak and more rises could be approved in coming months, but not necessarily at the next meeting.
Also, the ECB president did not say the Bank intended to exercise 'strong vigilance'.
These are the key code words the Bank has been using for the past eighteen months to signal to financial markets that that another interest rate increase is imminent.
He said that the Governing Council would 'monitor closely all developments'.
Trichet said that the bank was making no pre-commitment on future rate moves, but also stressed that it would do whatever was needed to control inflation.
The increase would help to anchor expectations of inflation while also supporting growth, he told the press conference.
Trichet warned that the risk of inflationary pressures in the euro zone continued to rise, and that the risks from rising pay were higher than had been anticipated.
Trichet said that a rise in liquidity and credit was also a risk for inflation.
The ECB said it was revising upwards its forecast for inflation in the 13-country euro zone this year to 2% from 1.8% previously, but held its forecast for next year at 2%.
Today's interest rate increase was very clearly signalled when the European Central Bank met in Dublin last month.
On that occasion, president Jean-Claude Trichet made it clear that the reason for the rate increase was to choke off rising inflationary pressures throughout the European economy.
The bank's doctrine is that low and stable inflation is essential for sustainable economic growth and job creation, and that the ECB's job is to control control price pressures.
Nevertheless, today's interest rate hike will present mortgage holders with another headache because their monthly mortgage repayments will rise. The increase will amount to about €15 for every €100,000 borrowed over 25 years.
It means that in net terms first-time house buyers nationally will now have to fork out €300 more per month in mortgage repayments than first-time buyers 18 months ago. For first-time buyers in Dublin the corresponding increase in net monthly repayment is €415.
