The European Central Bank (ECB) raised borrowing costs to their highest level in 22 years on Thursday and left the door open to more hikes, extending its fight against high inflation even as the euro zone economy flags.

The ECB increased its key interest rate – the one banks pay to park cash securely at the central bank – for the eighth consecutive time, by 25 basis points to 3.5%, its highest level since 2001.

The central bank for the 20 countries that share the euro also said it expected inflation to stay above its 2% target through 2025 and hinted once again at more rate hikes in the coming months.

"Future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary," the ECB said.

Growth in the euro zone is at best stagnating and inflation has been moderating for months, courtesy of lower energy prices and the steepest increase in interest rates in the ECB's 25-year history.

Late on Wednesday, the U.S. Federal Reserve broke its own string of 10 successive rate hikes – a powerful signal to investors around the world that the current tightening cycle across developed economies is nearing an end, even if a little more U.S. tightening is still possible.

But inflation in the euro zone is still unacceptably high for the ECB at 6.1% and underlying price growth, which typically excludes food and energy, is only starting to slow.

"Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labor market for the speed of disinflation," the ECB said.

That was set to keep the ECB on the tightening path, particularly after it failed to predict the current bout of high inflation and began raising rates later than many global peers last year.

Economists polled by Reuters before Thursday's decision expected another 25-basis-point deposit rate hike in July, as flagged by a host of policymakers.

While moves beyond July are less certain, ECB President Christine Lagarde is expected to keep a further hike in September in play and to push back against investor bets that the central bank will cut rates early next year.

Mixed picture

The ECB raised its inflation forecasts for this year, the next and 2025, when it was still expected to remain above the central bank's target, at 2.2%

While this would normally augur a pause in policy tightening, the ECB has been taking its own projections with a pinch of salt after years in which they missed the mark.

Instead, rate-setters have focused on actual economic data that have been painting a mixed picture.

Two quarters of contraction in industrial powerhouse Germany dragged the euro zone into a shallow recession last winter and the economy is likely to eke out only modest growth this year.

But unemployment is at record lows and wage growth is picking up, even if it still lags inflation.

Headline price growth has been falling fast after hitting double-digits late last year. But underlying prices, most notably for services, have yet to show the decisive drop ECB policymakers have said they would need to see before taking their foot off the monetary brake.

Higher borrowing costs are curbing demand for credit from households and companies as well as banks' willingness to lend, but consumption is holding up well in nominal terms.

"The Governing Council’s past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy," the ECB said in the statement.

These opposing factors were likely to have provided ammunition to both sides of the ECB's Governing Council – the hawkish majority that has been pushing for more rate hikes and a minority of doves who have been advocating a pause.