Insights 
VT 
The European Central Bank (ECB) has reached a neutral level of interest rates, which lies between 1.75% and 2.25%. The ECB is refraining from committing to a particular direction for future rate changes.
There is an increased risk that inflation could be lower than projected, necessitating a possible rate decrease. The bank will pause rate adjustments during the summer to observe data trends and make decisions from September onwards.
Projection For 2025
A potential additional rate cut is not ruled out for 2025, should inflation remain below the medium-term target. Market expectations suggest a final rate cut might occur in December.
This statement from the European Central Bank confirms that rates have reached a point considered to be neither boosting nor restraining economic activity. What this suggests is that the policy is currently set at a relatively steady position, awaiting further signals from the economy.
The policy stance now leans towards waiting and watching, rather than acting. The ECB is not promising to cut or raise interest rates next. Instead, the approach is measured, choosing to assess new figures as they come. Recent inflation readings have shown softer pressures than previously estimated, which, for now, removes the urgency to tighten further.
We are noting that forward-looking indicators, particularly in core prices and service inflation, are easing slightly. This pushes the probability of another rate hike further into the background. Indeed, the larger question currently under discussion is not if another increase is coming, but whether the expected trajectory of rate cuts could steepen, and under what conditions.
Driving Factors For Rate Decisions
Lagarde’s remarks underscore that rate decisions will heavily hinge on incoming data over the next few months. During the summer, rate levels are set to remain unchanged. It’s a deliberate pause. One that offers time for wage patterns, energy influences, and consumer demand to become clearer. If current disinflationary forces hold through Q3, December is increasingly being priced as a likely time for an adjustment.
As traders, we should pay less attention to the fixed meeting dates and more to the inflation figures two to three weeks prior to them. Reaction lags are present, but they are narrowing. The pricing for December now factors in at least one more 25 basis point cut. This is not mere speculation—it is aligned with the softer CPI momentum and a more cautious central bank tone.
Investors like Schnabel and Villeroy have each implied there is sufficient flexibility to make further moves if inflation undershoots persistently. Looking at the terminal rate shaping into 2025, the guidance does not provide any anchoring above current levels. Instead, the tilt is gently downward.
For us, this suggests a low probability of policy being tightened again in this cycle at all. Seasonal patterns in inflation—particularly the weaker-than-normal July to September range—may further support the current market path of lower implied rates into year-end.
Because central bank members have refrained from offering strong forward guidance, shorter-dated volatility will continue to play a central role. The spread curve between two and ten-year rates may narrow further, especially as holders of long EUR duration build protection heading into Q4.
Strategically, an environment like this rewards paying closer attention to ECB speak around forecast risk. Not headline inflation, but core inflation and wage metrics will hold the key. There are earnings agreements in France and Germany being renegotiated soon—signals from those will contribute to the overall disinflation narrative, or undermine it.
We should not expect consistent messages from all ECB members. Divergences within the council remain. But the broad message from the June communication is clear for us: risks are now balanced more delicately, but skewed enough to maintain a mild downside expectation for policy rates.
