Another Interest Rate Hike In Europe

Stock markets bumped up Thursday after the European Central Bank hiked interest rates for the fifth time this year, a moderate increase applauded as the right step to help shield the continent's consumers against climbing prices.

The quarter percentage point increase, the first since June 8, lifted the ECB's main refinancing rate to 4.5 percent, and was less than the half-point rise some economists had feared was in the works.

The Frankfurt-based bank unexpectedly boosted its main rate a half-point in June, shocking markets and drawing criticism for what many called a knee-jerk reaction that unnecessarily jacked up borrowing costs across the continent.

But this time, the mood was different.

"Today's increase was a very appropriate step for the ECB," said Petra Koehler, an economist with Dresdner Bank. "On the one hand, it took account of the growing effects of inflation, but it also didn't overreact to the exchange rate."

The rate decision came just a day after the embattled euro hit a three-month low against the dollar, fanning inflation fears for the 291 million people in the 11 European countries that use the common currency.

"The protracted depreciation of the exchange rate of the euro and the renewed rise in oil prices have increasingly put upward pressure on import prices and consumer prices in the euro area," the bank said in a statement released after the rate decision.

Inflation for the euro zone hit 2.4 percent last month, and the flagging euro only fuels higher prices by making it more expensive to buy imports. That's a problem for the Frankfurt-based central bank, which strives to keep inflation under a self-imposed 2 percent ceiling in the euro-zone by manipulating interest rates.

Hiking rates tends to cool inflation and boost the local currency, but it can also slow down an economy by making it more expensive for businesses to borrow money.

After Thursday's decision, the euro remained flat around 89.3 cents to the dollar but was still up from Wednesday's plunge to 88.75 cents, which stopped just a whisker above its record low of 88.45 cents.

European stock markets for the most part bumped up less than 1 percent, mostly in relief that the rate increase wasn't higher. Frankfurt's Xetra DAX Index climbed 0.6 percent, while London's FTSE index rose 0.9 percent.

"A half-point increase wouldn't help the euro and could possibly hurt the economy because some would still think the ECB was overreacting," said Michael Schubert, an economist with Commerzbank.

Analysts have tended to blame the weak euro on generally strong economic figures from the United States, which undermine confidence in investing in Europe.

But that trend could be in reverse.

On Wednesday, the U.S. Index of Leading Economic Indicators, which attempts to forecast economic trends for the next three to six months, dipped for the third time in as many months, suggesting a break from rapid economic growth fo the rest of the year.

And just last week, the ECB's counterpart in the United States, the Federal Reserve, passed on a chance to raise interest rates there, indicating another hike could stall the economy. Another increase would have been the seventh since last summer-- all part of an effort to cool down the U.S. economy and put the brakes on unsustainable growth.

"The European economy is quite robust at the moment, and there are some signs that the U.S. economy is slowing down," Koehler said. "The euro area can probably expect an additional rate increase later this year, while that's not the case in the United States."

Koehler said Thursday's quarter-point interest rate increase was not big enough to slow the snowballing European recovery, and predicted it could hit 4.75 percent by the end of the year. The ECB's main interest rate has already climbed 2 percentage points since November.