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European Central Bank Raises Interest Rates

The European Central Bank (ECB) has raised its key interest rates by a quarter of a percentage point, the first time in two and a half years that the bank has changed euro zone rates and the first raise in five years.

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The euro dipped slightly against the dollar as a result of the hike

The ECB, which has held its central "refi" refinancing rate steady at the historically low level of 2 percent since June 2003, raised the rate to 2.25 percent at its regular monthly policy-setting meeting on Thursday.

The "refi" is the rate at which the ECB provides the bulk of liquidity for the banking system via its regular weekly refinancing operations.

But there are also two other key interest rates: the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem; and the rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem. These were raised to 1.25 percent and 3.25 percent respectively.

Euro eases agai n st dollar

The euro meanwhile fell against the dollar after the ECB announced its decision, easing to $1.1751 in European trading, from $1.1770 just before the decision.

Europäische Zentralbank

European Central Bank headquarters in Frankfurt

The ECB has been responsible for monetary policy in the 12 countries that share the euro since January 1999.

Traditionally, the first of the ECB's two monthly meetings is dedicated to the issue of interest rates, while the second deals with more practical and administrative matters.

Nevertheless, the ECB retains the right to make interest rates decisions at any time.

The body responsible for making decisions within the ECB is the so-called governing council, an 18-strong committee comprising the six members of the executive board, plus the governors of all the national central banks of the 12 eurozone countries.

Each council member has one vote and decisions are taken by a simple majority.

No formal vote

Council members do not vote according to the interests of the country they represent, but in the interests of the single currency area as a whole.

Formal votes are rare on the council, which sees itself more as a forum for discussion. Instead, decisions are taken by consensus.

Jean-Claude Juncker

Jean-Claude Juncker

In attendance at the meeting on Thursday was Luxembourg Prime Minister and Eurogroup president Jean-Claude Juncker, who has been vocal in his opposition to a rate hike, and the EU's commissioner for economic and monetary affairs, Joaquin Almunia, neither of which cast any votes.

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