She said the bank could raise rates further to a neutral level if it sees inflation stabilizing at 2 percent.
“If we see inflation stabilizing at 2% over the medium term, a progressive further normalization of interest rates towards the neutral rate will be appropriate,” said Lagarde.
“If the euro area economy were overheating as a result of a positive demand shock, it would make sense for policy rates to be raised sequentially above the neutral rate,” she said.
This comes after a meeting last week of financial policymakers from the G7 economies, when central bankers and finance ministers were urged by economists to tackle inflation before the situation worsens.
Pressure on the central bank’s Governing Council has been growing to raise the deposit rate in July from its current level of -0.5 percent.
The -0.5 percent deposit rate has basically been below zero since 2014, after the ECB fought extremely low inflation.
Eurozone inflation has been running at almost four times the ECB’s 2 percent target at an all-time high of 7.4 percent in April, with rising prices causing pain throughout the bloc.
“I expect net purchases under the APP to end very early in the third quarter,” said Lagarde.
“This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”
Her latest comments indicate that the bank will implement two increases of 25 basis points each at the upcoming July and September policy meetings.
Lagarde has expressed sharp policy turnarounds, as she previously stated that the bank would rule out rate hikes this year only to raise them in the face of record-high inflation.
Raising the deposit rate by 50 basis points through September would still put the central bank behind peers like the Federal Reserve and the Bank of England, who’ve increased borrowing costs this year to quell surging inflation.
The Russian invasion of Ukraine in late February has worsened already high inflation in Europe, with prices soaring in recent months.
The price of fuel has jumped since sanctions on Moscow since the start of the conflict, which has spilled over onto other goods like grain and fertilizer.
The result has been skyrocketing commodity prices, along with a lack of confidence in the euro and uncertainty about the future of the wider European economy among businesses and households.
Slackening economic confidence is creating a difficult situation for central bank policymakers, as rate hikes to contain inflation may also threaten to slow activity further.
The euro has since weakened in recent months, putting pressure on cautious ECB officials, who view that a hawkish policy would make imports, a primary cause of inflation, become more expensive.
Meanwhile, the Federal Reserve and the Bank of England have already raised their policy rates this year to quell surging inflation, putting the ECB’s increase in the deposit rate by 50 basis points through September behind their Western peers.
While Dutch central bank chief Klaas Knot suggested last week the possibility of a large hike of 50 basis points, Lagarde still stood by her earlier statements that any increase in rates will be made in gradual increments, according to her blog post.
“This means that it is sensible to move step by step, observing the effects on the economy and the inflation outlook as rates rise,” said Lagarde.
Lagarde, said that she wanted to “clarify the path of policy normalization that lies ahead of us” and that she noted the ECB needed to keep its options open because of the uncertainty about future price growth.
She cautioned that the pace and size of any rate hikes are yet to be determined, as Eurozone economies faced dual supply shocks from China’s pandemic-related restrictions and disruptions from the war in Ukraine.
“This creates more uncertainty about the speed with which the current price pressures will abate, about the evolution of excess capacity, and about the extent to which inflation expectations will continue to remain anchored at our target,” said Lagarde said.
“Optionality is important to allow us to re-optimize the policy path as we go, especially as key variables underpinning that path will only become clearer with time,” she Lagarde.
The central bank president said that withdrawing monetary stimulus “promptly to stamp out the risk of a self-fulfilling spiral,” was an option.
Lagarde also stated that the ECB would be able to “design and deploy new instruments” to make sure that any new monetary policy is properly implemented throughout the Eurozone.
Talk of the first rate hike in more than a decade comes amid concern about a potential bond-market fragmentation among the 19 members of the Euro bloc, as governments increased their debt loads to help the economy recover from the pandemic.
Earlier gains in 10-year German bonds were erased, with yields rising 4 basis points to 0.98 percent.
