Europe raises interest rates

The European Central Bank has raised its key interest rate by a quarter of a percentage point to 3 percent in a bid to curb inflation.

    Economic confidence in the eurozone is the highest in 5 years

    The rate raise - the fourth such increase in eight months - had been expected according to analysts, as the bank tries to reign in price increases.

    The raise could lead to a sustained acceleration in the pace of rate hike.

    The Bank of England also raised its key interest rate by a quarter of a percentage point to 4.75 percent on Thursday, in what it said was a necessary move to curtail inflation. I

    It was the first change to the rate since August 2005, when the Bank of England cut the rate by a quarter of a percentage point to 4.5 percent.

    Although higher interest rates increase the cost of mortgages and auto loans, consumers can benefit from increasing yields on interest-bearing investments.

    The increase marked a departure from a pattern started in December of raising rates by a quarter-point in the last month of each quarter.


    Stubbornly high oil prices and fears that the threat of inflation is looming larger have led many analysts to expect more rate hikes, which may be as often as every two months.

    Expected changes

    Against this backdrop of above-target inflation as well as brighter economic prospects, all 49 analysts and ECB watchers polled by Dow Jones Newswires had said they expected an increase.

    All but one said it would be a quarter of a percentage point, with the other predicting a half-point increase.

    Twenty-nine of the economists polled by Dow Jones said they believed the interest rate would be at 3.5 percent by the end of 2006, while 17 said it would be at 3.25 percent, with the next increase likely in October, when the bank meets in Paris.

    Confident

    Economic confidence in the 12 eurozone countries reached its highest level in more than five years in July, while unemployment fell to a record low of 7.8 percent in June.

    Germany, the EU's biggest economy, showed that unemployment fell in July, when it usually rises.

    Other data said manufacturing in the euro zone expanded at close to its fastest pace in six years in July.

    Matthew Sharratt, an economist with Bank of America in London, said that this week's "stronger-than-expected sentiment data, together with inflation still well above target suggests that the ECB will likely be keen to continue withdrawing monetary accommodation."

    SOURCE: Agencies


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