The European Central Bank is very unlikely to raise interest rates next year because inflation is still too low, said European Central Bank President Christine Lagarde, putting a damper on market expectations for a move as soon as next October.

"We have clearly outlined the three conditions that must be met before rates begin to rise in our forward guidance on interest rates," she said. "Despite the current spike in inflation, the medium-term outlook for inflation remains subdued, and hence these three conditions are unlikely to be met next year." 

Lagarde's remarks come after she failed to shift market expectations last week, as investors briefly priced in two full moves next year before retreating to predict one hike in October.

ECB president Christine Lagarde hints at a change in the central bank's inflation target | Markets Insider

"Market interest rates have risen in recent weeks, primarily as a result of increased market uncertainty about the inflation outlook, spill-overs from overseas to eurozone policy rate expectations, and some questions about the calibration of asset purchases in a post-pandemic world," Lagarde said.

Lagarde also responded to the recent surge in yields, saying the ECB will continue to use emergency asset purchases to keep borrowing costs low. "An excessive tightening of financing conditions is not desirable at a time when purchasing power is already being strained by increasing energy and fuel expenses, and it would be an unwarranted headwind for the recovery," she said.

The ECB and financial markets have disagreed on the anticipated path of inflation, the single most important metric guiding policy. Investors are counting on more sustained price pressures that would spark policy tightening, while the ECB expects price growth retracting from current levels above 4% to below its 2% objective next year.