ECB executive board member Isabel Schnabel provides insights into the current monetary policy stance. She advocates for maintaining a steady approach, cautioning that upside risks to inflation are beginning to prevail. Potential drivers of inflation include tariffs, services, food, and fiscal policy, with tariffs likely having an inflationary effect on the supply chain.
The euro area’s economic growth is anticipated to surpass potential growth rates. However, the passthrough impact from a stronger euro is expected to remain limited. The remarks echo ECB President Lagarde’s recent statement that the balance of risks has become more balanced, moving away from a previous downside tilt.
Possibility of Rate Changes
It looks like the European Central Bank is telling us they will keep interest rates on hold for a while. The main message, however, is that the next move is more likely to be up than down. This suggests that any market pricing for rate cuts in late 2025 or early 2026 is probably wrong.
The reasoning is tied to inflation risks that are becoming more obvious. We just saw the latest August 2025 inflation data for the Euro area come in at a sticky 2.4%, with the problematic services component still running above 4%. These numbers support the view that the inflation fight is not over.
Added to this are concerns over new tariffs from ongoing trade disputes, which will increase costs for businesses. With the Eurozone economy growing faster than expected in the second quarter of 2025, at 0.5%, there is little economic pressure for the bank to consider cutting rates. This backdrop makes long positions in the Euro attractive against currencies with more dovish central banks.
Similarities to Prior Economic Conditions
This situation feels a lot like what we saw in late 2021, when officials signaled a pause before being forced to deal with persistent inflation later. As of today, the market is only pricing in a small chance of a rate hike by next spring. Given the data and the official commentary, this seems far too low.
Therefore, positioning for higher-for-longer interest rates seems prudent. This could involve selling futures contracts on the Euro Interbank Offered Rate (Euribor) for delivery in mid-2026. At the same time, volatility in the bond market is expected to rise, so buying options like straddles on German bund futures could be a good way to trade this uncertainty.
