By Atul Prakash
LONDON (Reuters) - European shares climbed to a two-week high on Thursday, boosted by a rally in mining equities, after the U.S. Federal Reserve left interest rates unchanged and projected a less aggressive path for hikes next year and in 2018.
The Fed, however, signalled it could still tighten monetary policy by the end of this year as the labour market improved further. Fed Chair Janet Yellen said U.S. growth was looking stronger and rate increases would be needed to keep the economy from overheating and fuelling high inflation.
The pan-European STOXX 600 index (STOXX) rose for a second straight session and was up 0.7 percent by 0748 GMT after touching its highest level in two weeks. However, the index is still down around 6 percent so far this year.
"Markets are getting support not only from the inaction of the Fed but also the relatively dovish comment by Janet Yellen. A rate hike is probable in December, but it has once again become clear that rates will go up only very gradually," said Philippe Gijsels, head of research at BNP Paribas (PA:BNPP) Fortis.
"With The Fed out of the way for some time, markets will start to focus on other things. The presidential election in the U.S. is just one of them. Volatility is probably the only certainty in the remaining months of the year."
Miners led the European stock market higher as the Fed's decision to keep rates unchanged pushed down the U.S dollar on currency markets, thereby making commodities cheaper for holders of other currencies.
The STOXX Europe 600 Basic Resources index (SXPP) rose 2.8 percent to its highest level since the middle of August. Shares in BHP Billiton (L:BLT), Anglo American (L:AAL), Rio Tinto (L:RIO) and Fresnillo (L:FRES) were up 2.7 to 3.4 percent.
Energy shares were also in demand after oil prices also rose on a weaker dollar, extending gains from the previous session when a surprise third consecutive weekly U.S. crude inventory draw tightened supply.
The European oil and gas index (SXEP) was up 1.2 percent, helped by a 1.3 to 1.5 percent rise in BP (L:BP), Royal Dutch Shell (L:RDSa) and Tullow Oil (L:TLW).
Among other sharp movers, EDF (PA:EDF) fell 2.4 percent after the French nuclear power utility said it was cutting its 2016 earnings expectations due to lower output.
Banco BPI (LS:BBPI) rose 3.8 percent after Spain's Caixabank (MC:CABK) launched a bid for the Portuguese lender and slightly raised its offer price. Caixabank shares were down 2.4 percent.