The European Central Bank (ECB) raised interest rates by half a percentage point on Thursday, its fourth successive hike, and outlined plans to shrink its bloated balance sheet from March, hoping that higher borrowing costs will finally arrest runaway inflation.

The central bank for the 19-country euro zone raised its deposit rate to 2 percent, as expected, and kept further hikes firmly on the table, as fresh economic projections indicated it would still take years to get price growth back to 2 percent.

The ECB has raised interest rates by a combined 2.5 percent percentage points since July, its fastest pace of monetary tightening on record, to counter inflation driven above 10 percent this autumn by soaring food, energy and now services prices.

"Based on the substantial upward revision to the inflation outlook, expects to raise them further," the ECB said in a statement.

Thursday's 50 basis point move marks a slowdown after back-to-back 75-basis-point hikes and mirrors the US Federal Reserve's own change of pace just a day earlier.

The ECB's next step in policy tightening will be a reduction in its 5 trillion euro stock of bonds, bought when it was trying to stimulate economic activity, which will make it more expensive for firms and governments to borrow.

"From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace," the ECB added. "The decline will amount to 15 billion euros per month on average until the end of the second quarter of 2023."

This process, known as quantitative tightening, will raise longer-term borrowing costs whereas more traditional rate hikes mostly lift short-term funding costs.

Also on Thursday, the Bank of England (BoE) raised its key interest rate to 3.5 percent from 3 percent and indicated that more hikes were likely, despite a looming recession, as it tries to speed inflation's return to target after price growth hit a 41-year high in October.

The BoE's Monetary Policy Committee voted 6-3 in favour of the move, and said "further increases in Bank Rate" may be required to tackle what it fears could prove to be persistent domestic inflation pressures from prices and wages.

"The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response," the BoE said.

The BoE statement did not repeat unusual language from November which said rates were unlikely to need to rise as far as markets expected. (Reuters)