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FTSE and European markets muted as ECB hikes interest rates by 50bps

European Central Bank Christine Lagarde. Stock markets in Europe were mixed, with the FTSE lower
The FTSE was muted on Thursday. The ECB could have its first rate hike in more than a decade. Photo: Daniel Roland/Pool via Reuters

European stock markets closed mixed on Thursday as the European Central Bank (ECB) raised its three key interest rates by 50 basis points to combat runaway inflation.

This was a larger move than it had previously signalled as financial markets priced in a 25-basis point hike.

In London, the FTSE 100 (^FTSE) lost 0.1% as markets closed across Europe, while the CAC (^FCHI) was 0.3% higher in Paris, and the Frankfurt DAX (^GDAXI) lost 0.4%.

It is the first rate hike in more than a decade, and comes amid pressure to follow the US Federal Reserve and other central banks, ending its experiment with negative interest rates.

"The governing council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. This decision is based on the Governing Council’s updated assessment of inflation risks," the ECB said.

It comes as the Bank of England (BoE) is also expected to press ahead with yet another rise in its August monetary policy committee meeting.

However, Michael Hewson of CMC Markets said: "The fact is a rate rise of...50bps is merely tinkering around the edges when it comes to inflationary pressures of this magnitude when headline rates are in negative territory, and the euro is down over 14% over the last 12 months having moved below parity against the US dollar. In reality its like bringing a knife to a gun fight."

Eurozone inflation increased to 8.6% last month.

Elsewhere, Russian president Vladimir Putin resumed pumping gas through the Nord Stream pipeline after a 10-day outage, with gas flowing to Germany at about 40% of capacity.

Benchmark European gas prices fell as much as 6.5% on the news, while the UK equivalent was down 5.3%.

Watch: How does inflation affect interest rates?

It also came as a record interest bill drove the UK budget deficit up to £22.9bn ($27.4bn) last month, the second highest June since records began in 1993.

The Office for National Statistics (ONS) said that borrowing was £4.1bn higher in June than the same month a year before. It also overshot the Office for Budget Responsibility (OBR) forecast by £600m.

Across the pond, the S&P 500 (^GSPC) dipped 0.1% and the tech-heavy Nasdaq (^IXIC)was treading water as European markets stopped trading. The Dow Jones (^DJI) edged 0.6% lower.

On Wednesday, the Nasdaq index jumped by 1.6%, closing at its highest level in over a month, outpacing the broader-based S&P 500 index which only managed a 0.6% gain. The positive mood was lifted by news of the US Senate voting to push forward $50bn in subsidies to boost domestic chip manufacturing in America.

Read more: Interest rates: the three central banks facing one tricky balancing act

Meanwhile, the dollar weakened as the euro (EURUSD=X) clawed its way back from parity to reach $1.02, after hitting 20-year lows against the US greenback earlier in the week. Sterling (GBPUSD=X) saw some recovery against the dollar too, with the pound trading at around $1.20.

Stocks in Asia were mixed overnight, with the Nikkei (^N225) climbing 0.4% in Tokyo while other key markets lagged. It came as the Bank of Japan maintained its ultra-low interest rates despite it forecasting that inflation will exceed its target this year.

The Hang Seng (^HSI) fell 1.7% in Hong Kong, and the Shanghai Composite (000001.SS) dipped 1% on the day.

Watch: What are SPACs?