ECB Expected to Raise Key Rates 4 Pct.

FRANKFURT, Germany - The European Central Bank is expected to raise its key interest rate by a quarter of a percentage point to 4 percent when it meets Wednesday, but economists will be looking for signals on further potential increases.

With the economy of the 13-nation euro zone growing at a healthy pace, bank President Jean-Claude Trichet said after the bank's governing council met last month that "strong vigilance" was necessary on inflation.

That phrase has long functioned as a code for markets that an increase - typically a quarter of a percent - was in the offing, and it has preceded the last seven increases since December 2005.

A poll of 52 financial institutions by Dow Jones Newswires showed unanimous agreement that the bank would lift its refinancing rate to 4 percent from 3.75 percent this week. That 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.

Looking ahead, 33 of the analysts expected an increase to 4.25 percent by the end of the third quarter, while 19 expected the rate to stay at 4 percent.

That compares with the current key rate of 5.25 percent in the United States and 5.5 percent in Britain.

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.

Year-on-year inflation in the euro zone was 1.9 percent in May - unchanged from the previous two months, and around the ECB's guidelines of just under 2 percent.

That suggests that beyond Wednesday's expected increase from 3.75 percent, the ECB probably will not rush into further increases.