The European Central Bank, or ECB, has raised its benchmark interest rate by a quarter of a percentage point to 4 and a quarter percent in a bid to rein in escalating inflation.

ECB President Jean-Claude Trichet announced the decision on Thursday despite worries that it could dampen growth.

"Maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long term inflation expectations firmly anchored in line with price stability."

While higher interest rates slow inflation, they can also slow economic growth as money becomes more expensive to borrow.

But Trichet appeared to have targeted inflation as the bigger threat.

Earlier this week, Eurostat, the EU statistics agency, said inflation in the 15-nation euro zone hit a record 4 percent in June, double the ECB's inflation target of below or around 2 percent.