European stock markets rallied Thursday after the US Federal Reserve and European Central Bank laid out inflation-fighting plans and the Bank of England hiked interest rates from a record low.

Asian equities also leapt after the Fed plotted a more hawkish path by speeding up the taper of its pandemic stimulus and signaled policymakers expect a number of interest rate hikes in 2022 and beyond as the economy rebounds.

London stocks added to gains after the BoE hiked its key interest rate to 0.25 percent from 0.1 percent, as it seeks to combat decade-high inflation despite fears that Omicron could slow economic growth.

Eurozone stocks rose after the European Central Bank, as expected, held interest rates at record lows, but like the Fed said it would end stimulus measures in March.

However, the mood was gloomy on Wall Street, where the Nasdaq sunk 2.5 percent by the close, giving up gains made the day before by traders enthused that the Fed didn't signal a more-aggressive pullback of its easy money policies.

However, Fed policymakers predicted as many as three interest rate hikes next year, and three more in 2023.

AJ Bell investment director Russ Mould said "would suggest the central bank has a clear plan to not let inflation get out of control. Equally, it isn't being too aggressive to trip up the economy."

Central banks are grappling with red-hot inflation fueled by reopening economies, runaway energy prices, the supply crunch and resurgent commodities.

But while policymakers are taking inflation pressures more seriously, they also insisted they remain watchful, should the spread of the Omicron variant of Covid-19 spark new restrictions and shutter swathes of the world economy once more.

The ECB indicated it would boost pre-pandemic bond buying after March to soften the transition after the end of the emergency measures, which it could reactivate if needed.

"The ECB clearly did not want to create a cliff-edge effect by abruptly reducing total (bond purchases) by 60 billion euros per month," said analyst Fawad Razaqzada at ThinkMarkets.

Despite the ECB now expecting inflation to rise to 3.2 percent in 2022 -- above its two-percent target for a second year in a row -- its chief Christine Lagarde said it is "very unlikely" the central bank will raise interest rates next year.

In London, investors shrugged off surveys highlighting a December business activity slowdown in both Britain and the eurozone due to fallout from the Omicron coronavirus variant.

But nonetheless the BoE moved forward with interest rate hikes.

"So, it looks like the BoE decided enough was enough and now is the time to slam the brakes on runaway inflation, with both consumer prices and wages overshooting expectations," said Razaqzada.

The US dollar held Wednesday's gains after the Federal Reserve took a more hawkish tilt and indicated it would hike interest rates several times as it tries to combat inflation
The US dollar held Wednesday's gains after the Federal Reserve took a more hawkish tilt and indicated it would hike interest rates several times as it tries to combat inflation AFP / Eva HAMBACH

New York - Dow: DOWN 0.1 percent at 35,897.64 (close)

New York - S&P 500: DOWN 0.9 percent at 4,668.67 (close)

New York - Nasdaq: DOWN 2.5 percent at 15,180.43 (close)

EURO STOXX 50: UP 1.0 percent at 4,201.87 (close)

London - FTSE 100: UP 1.3 percent at 7,260.61 (close)

Frankfurt - DAX: UP 1.0 percent at 15,636.40 (close)

Paris - CAC 40: UP 1.1 percent at 7,005.07 (close)

Tokyo - Nikkei 225: UP 2.1 percent at 29,066.32 (close)

Hong Kong - Hang Seng Index: UP 0.2 percent at 23,475.50 (close)

Shanghai - Composite: UP 0.8 percent at 3,675.02 (close)

Euro/dollar: UP at $1.1330 from $1.1289 late on Wednesday

Pound/dollar: UP at $1.3324 from $1.3262

Euro/pound: DOWN at 85.04 pence from 85.13 pence

Dollar/yen: DOWN at 113.67 from 114.04 yen

Brent North Sea crude: UP 1.1 percent at $74.71 per barrel

West Texas Intermediate: UP 1.6 percent at $72.03