FRANKFURT: The European Central Bank raised interest rates again on Thursday and put the reduction of its bloated balance sheet on the agenda, but said “substantial” progress had already been made in its bid 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. Further steps are almost certain as unwinding a decade’s worth of stimulus will take it well into next year and beyond.

The central bank for the 19 countries that use the euro raised its deposit rate by a further 75 basis points to 1.5% - the highest rate since 2009. ECB rates had been negative - below 0% - for eight years until it hiked in July.

It also cut a key subsidy to banks - an attempt to force them to repay early trillions of euros’ worth of ECB loans - and said detailed discussions on winding down the ECB’s huge holdings of mostly government bonds will begin in December.

While the bank dropped a reference in its policy statement to likely rate hikes at “several” more meetings, ECB President Christine Lagarde appeared to revert back to this terminology.

“We will have further rate increases in the future,” she told a news conference. “So it might well be several meetings.”

Markets nevertheless took Lagarde’s comments that a “substantial” part of policy tightening is done as a sign that rates may not go as high as previously thought.

Investors now see rates peaking at around 2.6% next year, below expectations for close to 3%, seen recently.

“We expect an additional 50 basis point policy rate hike in December, and a transition towards moving in 25 basis point increments next year as the hiking cycle pivots from policy normalisation to policy tightening,” PIMCO portfolio manager Konstantin Veit said. Lagarde argued that the ECB may have to “go beyond” normalisation, a comment suggesting that rates may go to a level that starts restrictive economic activity.

While this neutral rate is an undefined concept, most policymakers appear to put it at roughly 1.5-2%, suggesting the ECB is now at the bottom end of the estimated range.

The euro dropped a touch on the ECB’s rate announcement, while bond yields dropped sharply and bank shares rose, reinforcing views that markets had been pricing in a more hawkish decision. —Reuters