Mumbai: The European Central Bank (ECB)kept interest rates at a seven-year high to fight inflation despite fears of an economic slump mounts. ECB left the base lending rate unchanged at 4.25 per cent. The central bank had said it will wait until the second quarter of next year to cut borrowing costs.

Bank of England policymakers also voted to leave the central bank's key lending rate unchanged at 5 per cent as the UK economy wrestles with a major economic slowdown and accelerating inflation.

Europen inflation rate is rising at a 16-year highs, prompting unions push through demands for higher wages and companies to lift prices amidst  record energy costs and the stronger euro.

Economic confidence in Europe dropped the most since the September 11 terrorist attacks in July and Europe's manufacturing and service industries contracted for a second month.

ECB president Jean-Claude Trichet is holding a press conference to explain the decision. The Bank of England kept its key rate at 5 per cent, while the Czech central bank cut its rate by a quarter point to 3.5 per cent.

Inflation in the 15-nation euro region accelerated to 4.1 per cent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 per cent, but failed to do so since 1999.

The bank raised its benchmark rate by a quarter point on July 3, citing its concern that a wage-price spiral may develop.

Germany, Europe's largest economy, saw the largest wage rise of 3.5 per cent in the year through April, the biggest gain in 12 years. In Italy, wage inflation accelerated to 3.6 per cent in June.

``Our biggest concern is the inflation level,'' ECB council member Klaus Liebscher said in an interview published on July 25. ``We haven't exhausted our room for maneuver'' on interest rates.

Still, the yield on the Eonia March contract was 4.31 per cent today, down from 4.61 per cent two weeks ago.

Euro-region retail sales fell for a second month in July and German factory orders unexpectedly dropped for a seventh month in June, driven by a slump in exports.