FRANKFURT - The European Central Bank raised interest rates again on Thursday and signalled it was keen to start shrinking its bloated balance sheet, taking another big step in tightening policy to fight off a historic surge in inflation.

Worried that rapid price growth is becoming entrenched, the ECB is raising borrowing costs at the fastest pace on record, with further hikes almost certain as unwinding a decade’s worth of stimulus will take it well into next year and beyond.

In a series of complex moves, the central bank for the 19 countries that use the euro raised its deposit rate by 75 basis points to 1.5 per cent, as expected.

This takes the total increase to 2 percentage points over three meetings.

Until July, ECB rates had been in negative territory for eight years.

The ECB also cut a key subsidy to banks but made no hint about plans to start winding down its bond holdings after hoovering up trillions of euros of debt issued by euro zone governments since 2015.

“The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2 per cent medium-term inflation target,” the ECB said in a statement.

Markets expect the deposit rate to hit 2 per cent in December, then peak at around 3 per cent some time in 2023, although the excessively volatile outlook makes this timeline prone to changes.

While inflation is high and broadening, the overall picture may be more balanced than in the past as spot energy prices are falling, a looming recession will dampen price pressures, and there are no signs of a wage-price spiral. REUTERS