Insights 
VT 
The process of overcoming inflation has been marked as complete by an ECB policymaker. The US tariffs are noted to be deflationary, influencing monetary trends.
A cycle of decreasing interest rates is observed in the current monetary policy. Projections suggest this trend will persist until 2025. Inflation in the Euro Area is predicted to decline further, reaching approximately 1% by early 2026.
Rate Adjustment Uncertainty
The pace at which rate adjustments occur remains uncertain. Statements from all 26 Governing Council members are anticipated, asserting their success in controlling inflation. Despite varying stances, one member is notably more dovish, consistently maintaining this position over time.
This article so far highlights two essential aspects: first, the commentary from an ECB official signals a belief that inflation has been effectively curtailed, and second, the mention of US tariffs suggests they may be contributing to downward pressure on prices. Together, they reinforce a broader view that the forces pushing prices up have softened for now.
We’re watching a gradual transition into a rate-reduction phase—the kind that’s not immediate or aggressive, but one where monetary authorities nudge rates lower over time. Forecasts now extend this easing cycle all the way through 2025, possibly longer. Based on current expectations, inflation across the Euro Area may slide down close to 1% by the start of 2026. That drop, if realised, brings inflation well below target levels, implying that central banks might keep their foot off the brake for longer than usual.
What isn’t fully clear is how fast these rate moves will happen. Comments from every single policymaker on the Governing Council are expected, and many will likely frame recent inflation data as a win. While their views won’t all match up, we’ve seen one Council member keep a consistently more accommodative approach—a position that hasn’t shifted even when others leaned more hawkish.
Market Pricing and Strategy Adjustments
In recent weeks, we’ve noticed the market beginning to price in these rate cuts more confidently. That has consequences for positioning. If the longer-term disinflation path holds and the ECB turns less hesitant, it becomes less appealing to hold contracts that benefit from tighter policy. We’ve adjusted exposures accordingly.
Watching how volatility manifests at the front of the curve is key. Movements in the short-end suggest that markets now see very little chance of a policy reversal. That might change, but right now, rate cuts are the base case, with very little priced for upside risk. What this means for us is simple: we’ve skewed more towards structural steepeners and loosened up on hedges that relied on stickier inflation.
Li’s comments carry weight because they come on the back of recent economic prints that showed no alarming upticks. With energy base effects fading and core inflation weakening slowly but steadily, it’s no surprise that her forecasts carry credibility inside policy circles. It’s not only her remarks, though. Comments from earlier in the month from other officials support the idea that the path to normalisation—lower inflation, accompanied by modest rate action—is already underway.
Furthermore, trade developments like the announced tariffs in the US are acting almost like mild suppressants on global price pressure. Those moves don’t feed into domestic consumption directly, but they do reshape global cost structures slightly, softening forward inflation sentiments worldwide. For fixed income and rate-sensitive strategies, this dampens one of the few arguments left for holding repricing risk.
One reading of the current curve dynamics is that the market is accepting below-target inflation as a temporary feature, rather than a failure. In such an environment, we avoid chasing quarter-point vol around policy meetings and instead focus more on capturing risk premiums over wider timeframes.
With no press conference surprises expected and forward guidance tightly aligned, the narrative remains steady. The removal of hawkish risk means that any data shocks would have to be quite sharp to cause policy to deviate. Until then, we lean into the structure we’ve built—low realised volatility, less room for data-week premiums, and little appetite for near-term hawkish repricing.
As ever, the timeline ahead won’t be linear. But compared to a few months ago, the path is clearer, and the signals are more aligned. For us, that means adjusting to a house that is gradually priced lower, with less expectation for sharp turns. Our focus shifts to timing and carry, and not to policy escalation. The next inflection is not yet signed, and until it is, we hold to our positions with care, but not with hesitation.
