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Christine Lagarde, President of the European Central Bank (ECB), discussed the decision to maintain key interest rates following the October policy meeting. Lagarde addressed pressing concerns, noting a cooling in labour demand and unusually large household savings.
The ECB, headquartered in Frankfurt, Germany, is the Eurozone’s reserve bank, and it sets interest rates and manages monetary policy for the region. The ECB aims to maintain price stability with an inflation target of around 2%, primarily adjusting interest rates to achieve this. Monetary policy decisions are made eight times a year by the ECB Governing Council.
Quantitative Easing in Extreme Scenarios
In extreme scenarios, the ECB can implement Quantitative Easing (QE), a process where Euros are printed to purchase assets, usually weakening the Euro. QE was notably used during the Great Financial Crisis and the COVID pandemic. On the other hand, Quantitative Tightening (QT) is the opposite, where the ECB ceases purchasing bonds and reinvesting in maturing ones, often strengthening the Euro.
Lagarde indicated that despite the global environment remaining a drag, domestic consumption could benefit the economy, while continued large government expenditure may bolster investment. However, manufacturing orders point to a decline, impacted by tariffs and weak external demand.
The European Central Bank is signaling a prolonged pause, holding rates steady for now. We see this as a reaction to Eurozone inflation, which eased to 2.5% in September 2025 but remains stubbornly above the 2% target. This confirms the end of the aggressive hiking cycle we saw conclude back in 2024.
The weakness in manufacturing is a major concern, as the latest PMI figures for October showed a contraction at 45.8, dragged down by ongoing trade tariffs. Labour demand is also cooling off, with the unemployment rate recently ticking up to 6.7% across the bloc. These factors remove any pressure for further rate hikes and begin to build the case for an eventual cut.
Expectations for Interest Rate Cuts
However, we shouldn’t get ahead of ourselves expecting immediate rate cuts. Unusually large household savings, a remnant from the post-pandemic years, are still propping up consumption and services. This domestic spending is the main force preventing a broader recession and keeping the ECB cautious about reigniting inflation.
For traders, this means the focus shifts from betting on rate hikes to timing the first rate cut in 2026. Options on EURIBOR futures suggest the market is now pricing in at least a 50% chance of a cut by the second quarter of next year. The play is to position for this dovish pivot, even if the central bank is not telegraphing it yet.
This economic divergence, with a weak external environment dragging on a resilient consumer, also creates opportunities in currency and equity options. A weaker Euro seems likely against the dollar, making long-dated put options on the EUR/USD attractive. In equities, we anticipate consumer-focused stocks will outperform the broader industrial-heavy indices.
