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European Central Bank lifts key interest rate

/ Source: The Associated Press

The European Central Bank raised its benchmark rate a quarter of a percentage point to 4 percent on Wednesday, as the economy of the region that shares the euro currency grows at a healthy pace.

The increase in the cost of borrowing _ the eighth such move since December 2005 _ had been expected.

It will make everything from mortgages to auto loans more expensive for more than 317 million people in the euro zone, which accounts for more than 15 percent of the world's growth.

The ECB's key rate remains below those of the United States, at 5.25 percent, and Britain, at 5.5 percent.

But with the ECB's key interest rate now at its highest point since August 2001 and inflation within the ECB guidelines, markets and analysts will be seeking guidance about what comes next.

Earlier this week, a poll of 52 financial institutions by Dow Jones Newswires found 33 analysts expecting another ECB increase to 4.25 percent by the end of the third quarter, while 19 expected the rate to stay at 4 percent.

In the euro zone, business and consumer confidence have been rising, while growth _ at 3 percent in the first quarter _ is largely keeping pace with last year's levels and unemployment is falling.

The International Monetary Fund said Tuesday that euro-zone interest rates need to rise further to counter a pickup in inflationary pressures as the economy moves "from recovery to upswing."

But in a note on the 13-nation area, the Fund said the degree of tightening needed to tackle inflation is "uncertain." The head of the IMF's European department, Michael Deppler, said there was no need for rates to rise above 4.5 percent this year.

Inflation in the euro zone was 1.9 percent in May versus a year earlier _ unchanged from the previous two months, and around the ECB's guidelines of just under 2 percent.

That suggests that, beyond Wednesday's increase, the ECB probably will not rush into further increases.