Hi Boian.
In place archiving will not archive email out of an archive.pst file. Once mail is archived to the PST file, it is no longer controlled by Exchange. Previously archived items in the PST file are not deleted. Think of thhem as being orphaned from your mailbox.
I recommend turning off auto archiving in Outlook. Create a policy and rules using Archiving and Retention in Exch Online. Lower the aging to archive any item older than 1 year. The in place archive will appear as a separate mailbox in Outlook. You can open it in Outlook Web App too.You can still manually drag and drop items between mailbox and archive.