Though euro-zone inflation is only 1.2 per cent, ECB president Wim Duisenberg said the move was necessary to reduce the risk that inflation would edge higher. He suggested the boost, the first in the central bank's 10-month history, would suffice for now - but refused to be pinned down on when additional moves might be needed.

The rate increase was well received in financial markets, bolstering the young central bank's efforts to establish credibility. One sign of that was a rally in European bond markets, which pushed down long-term interest rates, a sign of waning fears about inflation and about the ECB's competence. European stocks rose; the zone's unified currency, the euro, rallied but then slipped lower on confirmation of the widely expected move.Unlike the ECB, the Bank of England didn't explain its separate move to raise its repo rate a quarter-percentage point to 5.50 per cent. Economists said the decision, also widely expected, likely was driven by stronger-than-expected economic growth in the third quarter, rising wages and the booming housing market.

The move came despite continued indications that inflation in the United Kingdom remains well-behaved, even though the labour market is tightening and average earnings are up 4.9 per cent from a year ago. Excluding mortgage payments, retail prices were up 2.1 per cent in September from a year earlier, below the Bank of England's 2.5 per cent target. Analysts expect UK interest rates to remain steady for at least three months, in part, they believe, because the central bank won't tinker with rates around the millennium. Bond yields fell sharply, with the benchmark 10-year UK government bond, or gilt, yielding 5.13 per cent, down from 5.30 per cent on Wednesday. UK share prices rose, albeit not to the same extent as those on the continent, where the ECB's move isn't expected to choke the euro zone's nascent recovery. Even at 3 per cent, the ECB's refinancing rate is as low as the old German central bank, the Bundesbank, ever pushed its key rate.

European consumers depend less on debt, and thus are less sensitive to interest rates than Americans. The typical German household's debt is 76 per cent of its after-tax income; Americans average 102 per cent. "Short-term interest rates, when compared with those from the last 10 years, are still very low," said Hennig A Klages.

-- The Wall Street Journal