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The decision marked a slowdown in the pace of tightening from 75-basis-point hikes at each of the ECB’s two previous meetings. Image Credit: AP

The European Central Bank raised interest rates for the fourth time in a row on Thursday, although by less than at its last two meetings, pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation.

The ECB has been raising rates at an unprecedented pace to rein in prices that have soared since economies reopened after the COVID-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia’s war with Ukraine.

The central bank for the 19-country euro zone raised the interest rate it pays on bank deposits from 1.5 per cent to 2 per cent on Thursday, moving further away from a decade of ultra-easy policy after being wrong-footed by the sudden rise in prices.

The decision marked a slowdown in the pace of tightening from 75-basis-point hikes at each of the ECB’s two previous meetings, as inflation shows signs of peaking and a recession looms.

The decision was in line with economists’ expectations and mirrored similar rate hikes at the Bank of England on Thursday and the US Federal Reserve on Wednesday.

But like the BoE and the Fed, the ECB flagged even higher borrowing costs ahead to persuade investors it is still serious about fighting inflation, which could stay above the ECB’s 2 per cent target through 2025.

The ECB gave a strong hint that future hikes will also be worth 50 basis points, quashing investors expectations for a further slowdown, and borrowing costs would remain “restrictive” - economic parlance for financing conditions that curb growth - for long.

“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2 per cent medium-term target,” the ECB said.

The ECB also laid out plans to stop replacing maturing bonds from its 5 trillion euro ($5.31 trillion) portfolio, reversing years of asset purchases that have turned the central bank into the biggest creditor of many euro zone governments.

Under the plan, the ECB will reduce monthly reinvestments from its Asset Purchase Programme by 15 billion euros starting in March and revise the pace of balance-sheet reduction from July.

The move, which mops up liquidity from the financial system, is designed to let long-term borrowing costs rise and follows a similar step by the Fed earlier this year.

European shares extended losses and the euro gained against the pound and the yen after the ECB’s decision.