FRANKFURT -- The

European Central Bank

raised interest rates Thursday, unexpectedly increasing its main refinancing rate by 25 basis points to 3.25%.

Although many central-bank watchers had anticipated the ECB would hike interest rates in the 11-nation eurozone over the course of the year, the timing of the increase comes sooner than expected, showing Europe's monetary authorities feared inflationary pressures were building as the region's economy recovered.

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The increase follows a similar

move by the U.S.

Federal Reserve

Wednesday and follows a 50-basis-point increase by the ECB last November. Speculation that the ECB might increase borrowing costs began earlier in the week after ECB President

Wim Duisenberg

expressed concern over the inflation that a weakening euro could import to the nations participating in the single currency.

The euro recently traded at $0.9725.

Duisenberg will hold a press conference later Thursday afternoon to explain the ECB's decision. The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria.