The latest ECB survey of professional forecasters for the third quarter of 2025 reveals a decline in expected inflation rates. Inflation for 2025 is projected at 2.0%, down from a previous estimate of 2.2%. For 2026, inflation is anticipated to decrease to 1.8%, compared to an earlier forecast of 2.0%.

The survey also addresses economic growth prospects with an upward revision for GDP growth in 2025. Growth is now anticipated to be 1.1%, an increase from the previous 0.9% estimate. Despite this, the 2026 GDP growth projection has been adjusted downward to 1.1% from a prior forecast of 1.2%.

Long Term Inflation Forecast

The long-term inflation forecast is steady at 2%, reflecting the European Central Bank’s goal for medium-term inflation rates. These adjusted projections provide insight into expected future economic conditions, focusing on both inflation and growth parameters.

Given the new survey data, we believe the European Central Bank has a clearer path to begin cutting interest rates. The forecast drop in inflation to the 2.0% target for 2025 gives policymakers the justification they need to start easing monetary policy. This view is strengthened by recent official statistics, which showed Euro area inflation already cooled to 2.4% in April 2024.

Therefore, our immediate focus in the coming weeks will be on interest rate derivatives that profit from falling rates. We will look to enter receive-fixed interest rate swaps and buy futures contracts tied to Euribor. This positions our portfolio for the widely expected rate cut in June and for subsequent cuts later in the year.

Opportunities and Market Strategies

The commentary from key officials supports a cautious but clear easing bias. President Lagarde has strongly signaled a first move next month but remains non-committal on the path forward. This creates an opportunity, as the market may be underpricing the total number of cuts required to combat the disinflationary trend shown in the new survey.

The outlook for 2026 inflation, now seen at just 1.8%, is particularly important for our strategy. This figure falling below target suggests the ECB may need to be more aggressive with easing than currently anticipated. We see value in options structures that bet on a faster pace of rate reductions through late 2024 and into 2025.

Sluggish economic activity provides a secondary reason for the central bank to act. The survey’s modest 1.1% GDP growth forecast is consistent with recent hard data, such as the HCOB Eurozone Manufacturing PMI which remained in contractionary territory at 47.3 in May. A weak economy cannot sustain high interest rates, reinforcing our bearish view on rates.

Historically, when the ECB has entered an easing cycle against a backdrop of weak growth, it has rarely stopped at just one or two cuts. The central bank tends to follow through until economic conditions show a marked improvement. We anticipate this historical pattern will repeat, making long-term positions for lower rates attractive.

This interest rate differential will likely weigh on the common currency. Consequently, we will also consider implementing strategies to short the Euro against the US Dollar. Buying put options on the EUR/USD provides a cost-effective way to speculate on a weaker Euro resulting from a more dovish central bank.

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