European Central Bank Hikes Interest Rates by 50 Basis Points to 3.0%

The hike, widely expected, is strengthening the euro and has likely put more hikes off the table for the foreseeable future.
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FRANKFURT -- The

European Central Bank

raised interest rates as expected Thursday, increasing its main refinancing rate by 50 basis points to 3.0%.

The half-point hike in the equivalent of the fed funds rate is the first increase in borrowing costs during the ECB's 10-month tenure and completely takes back the rate cut Europe's monetary authorities implemented in April.

While the move came as no surprise following the increase in hawkish rhetoric from ECB President

Wim Duisenberg

and other members of the bank's Governing Council, market participants were unsure whether the central bank would hike by 25 or 50 basis points. Besides likely buoying the euro, the larger hike should also help kill expectations of another rate increase for the foreseeable future.

The euro lately was quoted at $1.0561, up from a morning low of $1.0451 right around the release of the rate-hike news.

Although some of the smaller, faster-growing countries, such as Ireland and Finland, likely favored half a point to clamp down on any inflationary pressures, the big laggards Germany and Italy were thought to have preferred a quarter-point hike so as not to stunt their nascent economic recoveries.

Behind the tougher talk from Duisenberg in recent weeks have been buoyant eurozone data, which have supported the outlook for continuing economic recovery on the Continent. The latest purchasing managers' indices released earlier in the week showed improvement across the euro area.

That follows close on the heels of expanding figures for the eurozone's surging M3 money supply, with which Duisenberg had become increasing concerned over the past couple of months. Running above the bank's 4.5% target rate for months, a report last month showed M3 for September surged 6.1% from a year earlier, compared with 5.7% in August.

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

Outside of the eurozone, the

Bank of England

also raised interest rates Thursday, hiking the U.K. repo rate by 25 basis points to 5.50%. The move follows another quarter-point increase in September.