FRANKFURT, Germany – The European Central Bank raised its key interest rate by a quarter percentage point to 3 percent on Thursday, the fourth such increase in eight months as it tries to curb inflation.
The move had been expected as the bank tries to reign in price increases, and follows a similar move earlier in the day by the Bank of England.
It also could lead to a sustained acceleration in the pace of rate hikes — something markets will be looking for hints about from ECB President Jean-Claude Trichet.
The rate hike came only minutes after the Bank of England boosted its key interest rate a quarter percentage point to 4.75 percent in what it said was a necessary move to curtail inflation. That 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.
While higher interest rates increase the cost of mortgages and auto loans, they also can benefit consumers by increasing yields on interest-bearing investments.
Stubbornly high oil prices and fears that the threat of inflation is looming larger have led many analysts to expect more rate hikes to follow.
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.
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. In raising the key refinancing rate, analysts said that the decision would likely lead to the likely acceleration in the pace of rate hikes to every two months.
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.
Economic confidence in the 12 euro-zone 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. Moreover, figures from Germany — the euro-zone's biggest economy — showed that unemployment fell in July, when it usually rises as students look for work.
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."