Lagarde rejects neutral rate as ECB target after June hike
Lagarde said the ECB's neutral-rate estimate is not a policy trigger, even as traders price in more hikes after June's first increase since 2023.
Christine Lagarde is resisting the market’s push to turn the ECB’s neutral-rate estimate into a policy rule, even after the central bank lifted rates for the first time since 2023. The message from Frankfurt is that there is no automatic threshold for another move, even with borrowing costs now at 2.25% and investors still betting on more tightening.
That matters because the neutral rate is the level at which policy is seen as neither stimulating nor restraining the economy. Philip Lane has recently put that range at somewhere between 1.75% and 2.50%, which places the ECB’s deposit facility rate at the top end of that band after the June 11 increase. Traders are trying to read whether the ECB has room for one more hike without clearly moving above neutral, but Lagarde said that estimate is not used as an explicit goalpost when the Governing Council sets policy.
The June 11 decision raised all three key rates by 25 basis points, taking the deposit facility rate to 2.25%, the main refinancing operations rate to 2.40% and the marginal lending facility rate to 2.65%, effective June 17. The ECB also projected euro area headline HICP inflation at 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028, while core inflation excluding energy and food was seen at 2.5% in 2026 and 2027 and 2.2% in 2028. That forecast explains why policymakers are still focused on inflation rather than on any one estimate of neutral policy.
The central bank has said the war in the Middle East is generating inflation pressures, and Lane described the current environment as a “mid-sized inflation shock,” warning that inflation would stay above 3% for the rest of 2026. Lagarde said the shock was too large to ignore but not yet large enough to push up longer-term price expectations or generate dangerous second-round effects. The ECB’s stance remains that policy must stay data-dependent and consistent with its 2% medium-term target.
For borrowers, the distinction is practical. If the ECB signals one more hike, mortgage rates and business borrowing costs could stay elevated longer, especially for floating-rate loans tied closely to policy moves. If the bank pauses, funding costs could stabilize, but Lagarde’s refusal to anchor policy to a single neutral-rate estimate means markets will keep facing a meeting-by-meeting assessment. With one to two further hikes already priced in and a move by year-end fully discounted, the next ECB decisions are likely to turn on inflation, wages and the durability of Europe’s slowdown rather than on theory alone.
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