The European Central Bank (ECB) has decided to maintain key interest rates during its September 2025 monetary policy meeting. The deposit facility rate remains at 2.00%, aligning with expectations, along with the main refinancing rate at 2.15% and the marginal lending facility at 2.50%.
The ECB’s assessment of the inflation outlook remains largely unaltered from previous projections. Headline inflation is projected to average 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027, with core inflation anticipated at 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027.
Revised Economic Growth Projections
Economic growth for 2025 is now expected to be 1.2%, an upward revision from prior estimates of 0.9%. The growth forecast for 2026 has been slightly reduced to 1.0%, while the 2027 projection remains steady at 1.3%.
The ECB reaffirmed its commitment to a data-driven and meeting-by-meeting approach, without pre-committing to a specific rate trajectory. Market reactions have seen a minor dip in the euro, with EUR/USD easing from 1.1685 to 1.1670. The language of the ECB’s statement remains consistent, containing key terms such as “data-dependent” and “no pre-commitment.”
The European Central Bank’s decision to hold rates steady signals a period of stability, which means we should look at strategies that profit from low volatility. With the VSTOXX index, Europe’s main volatility gauge, having already drifted down to 14.5 from its highs earlier in the year, selling options like straddles on the Euro Stoxx 50 index could be profitable. This allows us to collect premium as long as the market remains range-bound, which seems likely given the lack of clear direction from the central bank.
Monitoring Key Economic Indicators
The ECB is telling us they will react to incoming numbers, so we must pay close attention to the next Eurozone flash CPI release. August’s inflation reading came in at 2.2%, slightly hotter than the ECB’s new forecast, meaning another high print could quickly shift sentiment and cause a spike in short-term rates. We should consider buying cheap, short-dated options on EUR/USD ahead of these key data releases to protect against or profit from any surprises.
While the ECB is on hold at 2.00%, we have to remember the US Federal Reserve’s rate is currently higher at 3.50%. This 150-basis-point interest rate difference makes being short the euro against the dollar attractive, as we can collect the daily interest, or “carry.” Looking back at the post-hike pauses of 2006 and 2018, these carry trades performed well until the market began to seriously price in rate cuts.
The ECB’s own projections contain some tension, with 2025 growth revised up to 1.2% but core inflation remaining sticky at 2.4%. This conflict between slowing long-term growth and stubborn inflation suggests the ECB will be hesitant to either hike or cut rates anytime soon. Therefore, trades betting on the front end of the Euribor yield curve to remain flat for the next few months look sensible.
