Europe’s Central Bank Increases Short-Term Rate

Europe’s central bank on Thursday raised its key short-term interest rate, in a move that helps set the stage for another rise in U.S. rates next week.

The European Central Bank increased its benchmark rate from 3.25% to 3.5%, citing the need to rein in inflation caused by the continent’s ongoing boomlet and by higher oil prices.

The U.S. Federal Reserve, also fearful of inflation, is expected to raise its key short-term rate from 5.75% to 6% when policymakers meet Tuesday. Higher European rates in effect help the Fed justify higher U.S. rates.

In Europe’s case, the rate hike also was aimed at halting the slide of the euro currency, which has tumbled in the last year. The currency got a slight boost in U.S. trading after the rate increase, closing at 97.1 U.S. cents in New York.

It remains well off its peak value of about $1.17 when introduced on Jan. 1, 1999, but has rallied from 93.9 cents at the end of February.

The need to use more, cheaper euros to buy gas and other oil products has been cited by economists as a major factor in Europe’s uptick in inflation this year.

In January, consumer price increases in the 11 nations that have adopted the euro as their official currency averaged 2%, annualized--the inflation ceiling that the ECB is required to hold.

It was the highest rate of inflation registered since the euro came into being Jan. 1, 1999. Since ECB governors last met March 2, economic indicators show that prices have continued to rise.

On the plus side, economic growth remains strong.

Economies of the 11 countries using the euro are projected to grow 3% on average this year, up from an estimated 2.1% in 1999.

The ECB’s governing board reassured Europeans that the outlook is rosy. “Economic conditions and prospects for the euro area appear to be better at present than at any time in the past decade,” the board said. “At the same time, upside risks to price stability were seen as a reason for vigilance.”

Thursday’s rate increase was the second this year. On Feb. 3, the ECB raised the key rate by a quarter point, to 3.25%.

In countries growing at the most torrid pace, inflation already is running well above the 2% euro zone average. In Spain, prices rose last month by an annualized rate of 3%.

The euro-bloc nations: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.