Lagarde says ECB rates sit at top of neutral range

Traders see under a 40% chance of an October rate increase, following two hikes earlier this year.

European Central Bank President Christine Lagarde said on Monday that interest rates are at the upper end of what she considers the neutral range, and that the central bank is not setting policy with reference to that neutral level.

Lagarde said the ECB is assessing conditions meeting by meeting rather than steering toward a fixed rate target. She has previously said wages show no material response to the energy shock, and has flagged upside risks to inflation alongside downside risks to growth amid what she called high uncertainty.

The ECB has raised rates twice this year. ECB Governing Council member Boris Vujcic has said the central bank has begun a tightening cycle. Bets on a further increase in October have been pared back after policymakers pointed to mixed signals on inflation and wages. Traders see under a 40% chance of an October rate increase.

Lagarde's comment that the ECB is not anchored to the neutral rate weakens the case for another hike and lines up with that pricing. Combined with her emphasis on data dependency, it points to a pause in the tightening cycle, making a near-term increase less likely even as inflation risks remain unresolved. Lagarde also said the ECB is working on swap lines meant to bolster euro area sovereignty, though she gave no detail on counterparts or timing.