Mortgage costs yesterday climbed to their highest level in seven years -- just days before the announcement of yet another interest rate hike.

On a day of worsening economic news, interest rates rose above the 6pc mark for the first time since 2001 after several lenders raised borrowing costs.

It comes as the European Central Bank prepares to announce another interest rate hike on Thursday, which will heap pressure on Irish householders already struggling to meet monthly repayments.

The widely anticipated move became a virtual certainty yesterday after it was confirmed that eurozone inflation surged to a record high of 4pc last month.

The rise in mortgage rates came as new figures gave the first official confirmation of the looming recession.

A report released by the Central Statistics Office showed the first reduction in economic output since records began.

And in a further blow to hard-pressed householders, oil prices are set to rise further.

Crude oil broke the $143-a-barrel barrier following concerns Israel may attack Iran over its growing nuclear ambitions and disrupt supply.

Meanwhile, unions and employers here remain at loggerheads in advance of negotiations on a new national partnership deal tomorrow, where a pay freeze will be mooted. Against this economic backdrop, ministers will meet this morning to begin making crunch decisions on where to slash €500m from budgets.

On the mortgage front, the Irish Independent has learned that Ulster Bank and First Active have now increased their standard variable rates to more than 6pc. Most existing mortgages are standard variables, which allow banks to increase rates whenever they want.

The two banks also hiked tracker rates for new customers.

Halifax also confirmed yesterday that it was increasing the tracker rates it charges new customers and those switching their mortgages to it.

There will be more bad news after Thursday, meanwhile, when the European Central Bank (ECB) is set to increase its main interest rate.

A move by the ECB will impact on people with existing tracker rates, as these mortgages go up each time the ECB raises rates. The ECB is expected to take its rate to 4.25pc, in a move that will add €45 to the monthly repayments on a €300,000 mortgage over 30 years. The cost of repaying a mortgage of this size has shot up by almost €400 since 2005, when ECB rates were just 2pc.

Confirming the looming recession, the economy shrank in the first quarter of the year, pulled down mainly by the dramatic slump in house building of almost a third.

And analysts warned that these latest figures from the Central Statistics Office boded badly for the economy, with trends indicating it would be difficult for the economy to achieve any growth whatsoever in 2008.

The CSO figures were negative right across the board and signalled the first reduction in economic growth since 2002.

Gross Domestic Product (GDP), a widely used monitor of economic growth, fell by 1.5pc in the first three months of the year to €46.8bn compared with 2007. It is accepted that two quarters of decline mark a technical recession for the economy.

The Cabinet meets this morning to discuss where cutbacks will have to be made in the second half of the year.

Finance Minister Brian Lenihan will also give a presentation on the tax and spending figures for the first six months, which are due to be published tomorrow. These exchequer figures are expected to show a €1.5bn shortfall in tax receipts.

Patch

Despite the pending cutbacks, ministers began to protect their own patches, as Social Welfare Minister Mary Hanafin insisted yesterday there would be no cuts to welfare payments.

But the minister's guarantee pre-empted any decisions taken by the Cabinet on what particular areas will be hit by the cutbacks.

The publication tomorrow of exchequer figures for the first half of the year -- expected to show a €1.5bn tax shortfall -- will force the Government to take action to curb spending.

Worries are also growing that oil prices are set to rise further.

The price of crude oil rose to above $143 a barrel, completing the biggest quarterly increase in nine years.

Pressure on Iran and the falling value of the US dollar may drive prices to $170 a barrel, OPEC President Chakib Khelil said this week.

- Charlie Weston, Ailish O'Hora and Fionnan Sheahan, The Irish Independent