European Central Bank Hikes Interest Rates to 4.50%

Europe's money mavens move to try and keep inflation under control.
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BERLIN -- As expected, the European Central Bank raised its main refinancing rate by 25 basis points to 4.50% Thursday, as Europe's monetary authorities try to keep inflation in check in the 11-nation euro zone.

ECB President Wim Duisenberg and his colleagues have continued to ratchet borrowing costs higher this year, as Europe's economic recovery has picked up speed and the weak euro has increased the danger of importing inflation from abroad. They last raised rates by 50 basis points in early June. After the ECB's action, the euro was trading slightly lower at $0.8931.

"The protracted depreciation of the exchange rate of the euro and the renewed rise in oil prices have increasingly put upward pressure on import prices and consumer prices in the euro area," the ECB said in a statement. Duisenberg will not hold a press conference to explain the bank's decision until the next meeting of the Governing Council to be held two weeks from now in Frankfurt.

Some observers had originally expected the central bankers to hold off a bit longer before raising rates by 50 basis points, but the smaller hike Thursday means another increase could come as soon as next month. The euro's persistent weakness has made dollar-denominated goods such as oil become even more expensive than they would be without the foreign exchange influence. That could force the ECB to hike rates even further than would be necessary to contain Europe's now robust economies.

Germany had long been the Continent's laggard, but is now finally getting back in form, giving the ECB little reason to refrain from raising rates moving forward. The government recently raised its outlook for growth this year to 3% from 2.75% and said the world's third-largest economy was experiencing some of its best conditions since German reunification ten years ago.

The ECB will continue to hold its refinancing operations as a variable rate tender with a minimum bid rate of 4.50%. The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria.