ECB's Lagarde sees rate at zero or slightly above by September

EUROPEAN CENTRAL BANK (ECB) president Christine Lagarde said on Tuesday (May 24) she saw the ECB's deposit rate at zero or "slightly above" by the end of September, implying an increase of at least 50 basis points from its current level.

Her comments sent the euro rising against the dollar as markets priced in the risk of bigger ECB rate hikes this summer to fight record-high inflation.

"We're moving very likely into positive territory at the end of the third quarter," Lagarde said in an interview with Bloomberg TV.

Asked to clarify that comment, she added: "When you're out of negative (rates) you can be at zero, you can be slightly above zero. This is something that we will determine on the basis of our projections and.... forward guidance."

Lagarde had said on Monday the ECB would be "out of negative rates" by the end of September, which many investors took to mean at zero.

This was already seen as a remarkable turnaround for a central bank that hasn't raised rates for over a decade, has charged banks on their idle cash for 8 years and had until recently been all but ruling out rate hikes this year.

Money markets are now pricing in some 64 basis points worth of hikes by the ECB's Sep 14 meeting and 110 basis points by the end of the year.

Eurozone inflation has for months been coming in much higher than the ECB expected, surging to an all-time high of 7.4 per cent in April and forcing the central bank to follow global peers such as the Federal Reserve on the path to higher rates.

But Lagarde insisted the ECB would move only gradually because inflation was driven by supply - a reference to more expensive fuel due to the Ukraine war and to Covid-related restrictions in China - rather than soaring demand.

"I don't think we are in a situation of surging demand at the moment," Lagarde added. "It's definitely an inflation that is driven by the supply side of the economy."