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Attempting to Reduce Inflation, Europe Raises Euro Interest Rate

By John-Thor Dahlburg

Following the U.S. Federal Reserve’s lead, Europe’s central bankers hiked interest rates on the euro by one-quarter point Thursday, eager to tamp down inflation and rescue the multinational currency that hit record lows this week.

Leaders of the European Central Bank raised the benchmark interest rate, the Refi, to 3.25 percent. It was the third rate change in the short history of the euro, which was created Jan. 1, 1999, and exists in all forms but cash.

The ECB’s president, Wim Duisenberg of the Netherlands, said he and other members of the bank’s governing council were worried that the slump in the euro’s value -- it dropped to a record low of 96.65 U.S. cents Monday -- would kindle inflation because imports priced in dollars and other foreign currencies, including petroleum, would cost more in Europe.

Some analysts read Duisenberg’s comments as presaging another rate hike soon.

“Monetary policy must act in looking toward the future,” Duisenberg said.

The Europeans acted a day after the U.S. Federal Reserve raised short-term lending rates by one-quarter point to 5.75 percent, the highest level in more than four years, also to keep inflation at bay.

Analysts said the U.S. Fed’s decision increased pressure on the Europeans to act, since higher U.S. interest rates make dollar investments even more attractive to the detriment of the euro.

Since its inception, the euro has lost over 16 percent of its value relative to the dollar. Duisenberg on Thursday said higher interest rates should boost the euro’s value by ensuring its attractiveness for foreign investors.

The ECB’s chief mandate is to keep inflation in the euro zone below 2 percent annually. The 11 euro countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.