Insights 
VT 
Survey data suggest weaker prospects for economic activity in the near term. Challenges such as prior tariffs and a stronger euro are anticipated to impact exports negatively.
Uncertainty in the market is causing delays in investment decisions. Risks to the growth outlook are primarily on the downside.
Interest Rate Considerations
Interest rate decisions will consider factors such as the inflation outlook and the dynamics of underlying inflation. The strength of monetary policy transmission will also influence these decisions.
Progress towards a digital euro is identified as a strategic priority. The focus remains on adapting to the evolving economic landscape.
The most recent survey figures paint a somewhat downbeat picture for what lies ahead. Output expectations have dipped, and exporters may come under pressure due to earlier tariffs still working their way through supply chains, along with the drag effect of a stronger euro. That combination of external headwinds could begin to wear down profit margins, particularly in sectors most exposed to international demand.
From what we can see, there’s little evidence that businesses feel confident diving into new projects. With inflation stubborn in some areas and demand showing patchy signs of life, hesitation in committing to capital expenditure is likely to persist into the early part of the next quarter. That said, these are not conditions where new hiring or expansion makes a great deal of sense—especially when there’s so little clarity about where the next spur of growth might come from.
Policy Rate Path and Inflation
The downward pull on overall prospects is not balanced out by any solid sources of upside risk. While energy prices have come off last year’s highs, the gains are being offset by the longer-term implications of restrictive financial conditions. Against this backdrop, the forward path for policy rates will not only have to factor in headline inflation, but also the more embedded parts—those that tend to move slowly and are harder to dislodge once they climb.
Lagarde has already made it clear that policymakers remain data-dependent. It’s not just about where inflation is going—it’s also about how quickly the full effects of past actions filter through the system. Some parts of the bloc feel stronger policy transmission than others. That regional discrepancy matters now more than it used to.
Meanwhile, work on a digital version of the euro continues. For us, this is not a headline-grabbing initiative; it’s being treated as a concrete operational goal. Panetta described it as foundational for the future of payment infrastructure, but we don’t expect anything to disrupt the current monetary setting in the near term because of it.
As we move into the next few weeks, volatility in rates expectations is likely to stay elevated. Swaps traders should be attentive to upcoming inflation prints—particularly core components, which policymakers have shown a preference for tracking closely. HICP data in Germany and Italy will carry extra weight. Market pricing might shift abruptly if we see meaningful deviations.
We think it’s best to keep an eye not only on standard indicators but also on real-economy signals. Credit surveys, for instance, can reveal where stress is building before it shows up in headline data. And we should watch for any shift in the way central banks describe medium-term risks. When their tone shifts, even slightly, it tends to end up being a precursor to actual decisions.
Lastly, don’t discount the pace of monetary transmission across retail and corporate lending. It tends to lag, but it’s there. Understanding those mechanics—the speed, the lags, the differences across regions—offers better context than just glancing at rate differentials in isolation.
