European shares set new highs after ECB ups rates

European shares closed 1.6 per cent higher at a new high yesterday on market relief the European Central Bank's first interest rate increase in five years was not the start of an aggressive hiking programme to cut spending.

The FTSEurofirst 300 index of pan-European blue chips closed up 1.6 percent, or 20.3 points, at 1,256.4, setting a new three-and-a-half-year peak of 1,256.37. Yesterday's gain was the biggest one day points gain since October 31.

Defying resistance from politicians and business leaders, the ECB lifted its benchmark rate by a well-flagged 0.25 percentage points to 2.25 per cent, and ECB President Jean-Claude Trichet signalled any future increases would be moderate.

Both the FTSEurofirst and the narrower DJ Stoxx Euro 50, which closed 1.6 per cent higher, added almost 1 percent after the ECB rate news, which weakened the euro and drove eurozone bond futures higher.

Meanwhile, Wall Street was stronger as a key US economic measure signalled inflation may be under control, and analysts said the ECB rate hike would draw more investment to the US.

"The ECB has been as good as its word and delivered the goods on tightening. By raising rates by a quarter rather than a more aggressive half point hike, it has chosen the monetary middle ground and probably avoided a bigger political spat with Eurozone governments," Bear Stearns said in a note.

"The positive news as far as the markets are concerned is that Trichet has repeated that the current move does not signal that the ECB is moving into a series of consecutive rate hikes similar to the US Fed," the brokerage said.

A firmer crude price nudging towards $58 a barrel underpinned oil producers, with shares in majors like BP and Total gaining around 2.5 per cent each.

Firmer gold, silver, copper and other metals prices buoyed basic resource firms like miner Rio Tinto, while Swiss financial groups Credit Suisse and UBS rose around three per cent after Deutsche Bank raised their price targets.

In addition to the Swiss financials, Dutch group ING was a top blue-chip gainer, rising 2.3 per cent after Deutsche Bank added the stock to its pan-European focus list and removed Allianz and Carnival.

"Despite recent strength, ING materially underperformed its peers year to date. ING has one of the premier franchises across its markets (Netherlands, the US retirement market, Asia), and recent results underlined this," the bank said in a note.

Car stocks also gained, with Fiat shares rising two per cent after industry sources - later confirmed by Italy's Transport Ministry - said the group took 30.1 per cent of Italian new car sales in November, the first time it had climbed above 30 per cent since January 2004.

French carmakers Peugeot and Renault gained 2.2 per cent and 3.4 per cent, respectively, after new French car registrations in November slowed their decline.

French new car registrations dropped 2.1 per cent in November compared with a year ago, but the decline was less pronounced than the 5.8 per cent drop in October, according to the CCFA French car industry body.