By BRIAN BLACKSTONE

The European Central Bank raised interest rates for the first time in nearly three years Thursday, but sought to reassure investors that it won’t embark on a rapid-fire series of increases that could disrupt fragile economies in parts of the euro bloc.

Despite those assurances, many analysts expect more increases to follow in increments of about once every quarter into 2012, amid steadily rising inflation.

That would leave the ECB well ahead of its counterparts at the Federal Reserve, Bank of England and Bank of Japan, which could push the euro higher against other major currencies, weighing on European exporters.

It is a tricky balance for the ECB’s longtime president, Jean-Claude Trichet, who appears to be betting that a strict anti-inflation message will more than offset further damage to the bloc’s rate-sensitive periphery, where a debt crisis this week claimed a third victim, Portugal.

“We did not decide today that it was the first of a series,” Mr. Trichet said at a news conference after the ECB’s monthly meeting, in which members voted unanimously to raise the ECB’s main policy rate to 1.25% from 1%.

The Bank of England voted to hold rates at a record low Thursday despite high inflation, in order to safeguard a shaky recovery.

The Bank of Japan held rates steady and pumped an additional $11.7 billion in loans into an economy suffering in the aftermath of earthquake and nuclear crisis.

The Federal Reserve, which didn’t meet Thursday, is still engaging in asset purchases to spur growth and isn’t expected to raise rates from near zero for many months.

Mr. Trichet suggested the ECB remains concerned about the prospect of higher energy and food prices seeping through the economy via wage and retail-price increases.

“We are extremely alert in this respect,” Mr. Trichet told reporters. “We will not tolerate second-rough effects.”

The risk of higher inflation remains even after Thursday’s decision, the ECB said, adding that it will “monitor very closely” price developments.

In ECB-speak, “monitor very closely” is only one step below “strong vigilance”—the term the ECB used last month in signaling a rate rise.

“The official line is that it’s not the first of a series, but I think they have kept the door firmly open to further interest-rate increases as early as June,” said Royal Bank of Scotland economist Nick Matthews.

Inflation across the euro zone was 2.6% in March, well above the ECB’s target of just under 2%. Many economists expect it to approach 3% this summer, as past energy and commodity-price gains kick in.

Mr. Matthews expects a June rate increase to be followed by two more in the second half of the year, leaving the ECB’s policy rate at 2% by year’s end.

That would have a damaging effect on the euro bloc’s periphery of Spain, Portugal, Ireland and Greece, many analysts warn.

Those economies carry crushing private-sector debt loads whose financing is closely tied to short-term interest rates, a lethal cocktail for countries struggling with burst property and debt bubbles.

“If it’s a change to more normal monetary policy, then this will have certainly an impact on growth, on credit and on nonperforming loans,” said Fernando Fernandez, professor at IE Business School in Madrid.

In Spain, more than 90% of mortgages are tied to short-term interest rates.

If the ECB delivers 0.75 percentage point in rate increases this year, as many ECB watchers expect, it would add almost €1,000, or around $1,430, per year to the average Spaniard’s mortgage payment, Mr. Fernandez estimates.

Carsten Brzeski, an economist at ING Bank in Brussels, says that based on the structure of lending and interest rates, Spain, Italy, Greece, Ireland and Portugal will be most affected by higher ECB rates.

The least affected include Germany, France, the Netherlands and Finland—all countries that are growing solidly and could better weather higher borrowing costs.

Mr. Trichet played down the effect Thursday’s rate increase will have on Europe’s wide economic divide.

“It is in the interest of all members of the single market, with a single currency, that we maintain maximum credibility for the anchoring of inflation expectations,” he said, insisting that interest rates “across the entire maturity spectrum remain low.”

Mr. Trichet received a stark reminder of the periphery’s fragility less than 24 hours before the ECB decision, when Portugal said it would seek a bailout from its European peers, joining Greece and Ireland, which accepted bailouts last year.

The ECB encouraged Lisbon to seek aid, Mr. Trichet said.

The dilemma for the ECB is that those three countries, though confronting enormous risks, combine for just 6% of euro-zone GDP, about one-fifth as much as Germany alone.

Highlighting the north-south divide, Germany on Thursday reported a robust 1.6% rise in factory output in February from January.

Germany‘s major think tanks upgraded their GDP growth forecasts this year to 2.8% from 2%.

Of the major, developed-country central banks, the Bank of England will likely be next to follow the ECB.

At 4.4%, U.K. inflation is more than double its 2% target, and some analysts expect a rate increase as soon as May, when the bank issues its next inflation report.

In contrast, the Federal Reserve is expected to hold rates near zero until late 2011 at the earliest, to safeguard an uneven recovery with high unemployment.

One source of divide, at least between the ECB and Fed, is how much of a difference still exists between current levels of output and where production would have been without the recession. Economists call this the “output gap.”

The wider the gap, the more aggressive central banks can be in spurring growth without worrying about inflation.

Economists at Goldman Sachs estimate that the 2008-2009 recession opened up an output gap in the U.S. equal to about 6% of GDP, nearly twice the gap in the euro zone.

“In the Anglo Saxon countries, the assumption is that there’s a huge output gap…so you should do everything to get back to (the pre-crisis) path,” said Daniel Gros, director of the Center for European Policy Studies, a Brussels think tank.

Source: Wallstreet