European shares consolidated gains on Thursday in a volatile session, but banks led a fall in the UK's FTSE 100 index after the Bank of England unexpectedly raised its key interest rate to 5.25 percent, according to Reuters. By 1300 GMT, the pan-European FTSEurofirst 300 index was up 0.5 percent at 1,484.4, edging up after the European Central Bank kept interest rates on hold as expected, while the FTSE 100 index was down 0.2 percent at 6,150.8 points. The euro briefly pared gains against the dollar and bund futures held steady. The FTSEurofirst index earlier pared gains after the UK raised borrowing costs. UK banks HBOS and Northern Rock both fell about 2.5 percent. "While we would expect all the housing market related banks to suffer, the two stocks that stand out are HBOS and Northern Rock," analysts at Fox-Pitt, Kelton said. "Both are the most exposed to wholesale funding and have enjoyed the better stock price performance in the run up to today." Among gainers, shares in Deutsche Boerse jumped 4.2 percent to a record high, lifted by news of good growth at its clearing arm, Clearstream, and a rise in U.S. exchange NYSE Group overnight, analysts said. Interest rate decisions were the main drivers of markets on Thursday, with the European Central Bank holding rates steady at a five-year high of 3.5 percent, but analysts and markets expect the ECB to raise rates in February or March amid strong data. ECB President Jean-Claude Trichet holds a news conference at 1330 GMT on Thursday and markets will scrutinise his speech to see if the ECB steps up its stance on inflation dangers. INTEREST RATES "As the euro-zone economy will enter 2007 on a rather strong footing, a 25 basis points hike during the first quarter of 2007 is completely priced into current forward rates," ING economists said in a note. Some fund managers however said clues on the performance of the U.S. economy held the key to market direction. "We will continue to have volatile markets. We have made some good gains in the last six or seven months," said Jeff Currington, European equities fund manager at Credit Suisse. The FTSEurofirst 300 index rallied 16 percent in 2006. "There's enough uncertainty in terms of what's happening in the U.S. and other places," said Currington. So, we'll probably have a market which is volatile but isn't necessarily that much higher in mid-year than it is in now." Across Europe, Paris's CAC 40 rose 0.4 percent and Germany's DAX was up 0.25 percent. RETAILERS IN LIMELIGHT European retailers were in focus, with Metro shares up 1.3 percent after Germany's biggest retailer said sales jumped 10.1 percent in the fourth quarter, boosted by acquisitions and strong Christmas sales. However, J. Sainsbury shares fell 2 percent after its trading update disappointed some investors. Among gainers, BHP Billiton, Rio Tinto and Anglo American all rose amid mixed base metal prices. Oil majors BP and Total inched up after falling sharply on Wednesday, while oil prices dipped. Franco-Spanish tobacco group Altadis jumped as much as 2.8 percent to a record high of 41.3 euros before paring gains, after a report that Britain's Imperial Tobacco was considering a 10 billion euro bid for the firm.
