Insights 
VT 
ECB policymaker Francois Villeroy de Galhau has expressed that further rate cuts remain on the table despite current economic conditions. Inflation expectations are seen as moderate, with recent increases in oil prices partially counteracting the appreciated euro.
Villeroy mentioned that if an Iran-Israel ceasefire occurs, it may lead to policy adjustments within the next six months. However, he noted that oil prices alone are not a decisive factor in determining policy actions.
Neutral And Terminal Rates
He clarified that a neutral rate and a terminal rate are different concepts. The ECB plans to observe how situations develop before taking further steps.
Currently, markets anticipate approximately 23 basis points of rate cuts by the end of the year. The ECB is maintaining a flexible approach without committing to immediate changes.
Villeroy’s remarks help shed light on what may lie ahead for euro-area monetary policy. His emphasis on the difference between a neutral rate and a terminal rate suggests that the central bank is not yet at its final destination, despite recent moves. Where the neutral rate serves as an estimate of equilibrium – a notional level that neither stimulates nor restricts the economy – the terminal rate represents where rates might ultimately settle at the end of a hiking or cutting cycle. These two are not interchangeable, and understanding that distinction allows us to appreciate the intention behind the ECB’s current wait-and-see posture.
The mention of geopolitical risks – specifically a potential Iran-Israel ceasefire – signals that the bank is closely studying external pressures beyond typical inflation indicators. Villeroy seems to be indicating that while energy prices, especially crude, may exert temporary influence on headline inflation, they won’t drive decisions on their own. That’s an important nuance: it reinforces that supply-side shocks, like oil, will be weighed alongside domestic demand and wage trends, rather than in isolation.
Market Expectations And Strategy
Market expectations continue to price in close to one standard cut before the year ends – roughly 23 basis points. That aligns with our own assessment: traders are currently leaning gently toward continued easing, but with a cautious hand. The ECB’s avoidance of specific forward guidance confirms that they’re not willing to lock themselves into a course – not until the data gives them more conviction.
What’s striking here is not just the content of Villeroy’s speech, but the tone. It was deliberate, designed to keep options open without giving false certainty. For us, it’s a reminder to remain nimble. This isn’t a cycle where linear assumptions will work for long. Changes to rate expectations are likely to be subtle, spaced out, and often conditional on factors outside of core inflation, including global diplomacy and commodity flows.
In the coming weeks, this suggests a less aggressive stance when placing directional bets on rates. Short-term volatility is still being shaped more by rhetoric than action. Volatility sellers might find fewer opportunities unless macro prints surprise materially. Duration traders may prefer smaller, incremental entries, especially around key data releases or central bank minutes.
If oil prices reverse direction or wage growth accelerates, the curve can steepen quite sharply. We have to watch these inflection points closely. Long-dated contracts might overprice dovish expectations right now – just something to back-test against the last few ECB reaction functions.
The data path will matter more than usual over the summer. European PMIs, wage deals, and even regional inflation readings – say, from Germany or Belgium – may carry higher-than-normal signal value. Positioning can therefore afford to be lighter but more tactical, focusing on short windows when event risk tilts probability in one direction.
In times like these, flexibility becomes more than a strategy; it’s almost a prerequisite. One or two well-timed conversions could materially shift the rate path markets are seeing. That’s what makes clear communication from policymakers so important – it lets us build probability tables that respond rather than forecast.
