The European Central Bank today raised interest rates for the first time since the onset of the credit crunch as it stepped up its fight against inflation.

It increased them from 4% to 4.25%, with president Jean-Claude Trichet warning the ECB was on heightened alert over inflation. It hit 4%, double the ECB's target, in the eurozone last month.

The rise, the first since June last year, came despite mounting political opposition and increasing signs the economy is heading for a sharp slowdown.

The Bank of England faces its own battle against inflation at a time of declining economic growth. Inflation is running at 3.3%, and is likely to top 4% or even 4.5% in the coming months.

The Bank has cut rates three times since December to bolster economic growth, but is widely expected to leave rates on hold at 5% next week.

Kate Barker, a member of the Bank's monetary policy committee and author of a major report into housing for the Government, today warned the housing market is "under enormous pressure" as a 1970s-style stagflationary recession loomed.

"Different sectors are suffering different pressures - the construction industry in particular and housing are under enormous pressure," she said.

Barker added that the big question for companies was how far they could contain-costs amid soaring oil and food prices.

"The thing that has stood out for me is just how strong some firms' cost pressures are, coming from food, oil and other commodities," she said. "We know this because producer prices are so strong."

The Bank's new Deputy Governor, Charlie Bean, said the UK is facing its most challenging period since the recession of the early 1990s against inflation.