It doesn't. It has to connect to SOME LLM provider, but that CAN also be local Ollama server (running instance). The choice ALWAYS need to be present since, depending on your use case, Ollama (local machine LLM) could be just right, or it could be completely unusable, in which case you can always switch to data center size LLMs.
The ReadMe gives only a Antropic version example, but, judging by the source code [1], you can use other providers, including Ollama, just by changing the syntax of that one config file line.
[1] https://github.com/localgpt-app/localgpt/blob/main/src%2Fage...