The European Central Bank cut its key rates by 25 basis points in its June 2025 monetary policy decision. The deposit facility rate now stands at 2.00%, unchanged from expectations but previously at 2.25%. The main refinancing rate is at 2.15%, aligning with expectations but reduced from 2.40%. The marginal lending facility rate decreased to 2.50%, previously set at 2.65%.

Inflation is expected to align with the medium-term 2% target, with projections averaging 2.0% for 2025, 1.6% for 2026, and returning to 2.0% in 2027. Core inflation is projected at 2.4% for this year and settling at 1.9% for the following two years. Real GDP growth projections are 0.9% for 2025, 1.1% for 2026, and 1.3% for 2027.

Monetary Policy Approach

The ECB maintains a data-dependent approach, making decisions from one meeting to the next without committing to a specific rate pathway. Recent projections show little change in economic forecasts with core inflation remaining steady. Headline inflation adjustments are attributed to lower energy prices and a stronger euro. The decision had little impact on EUR/USD, which remained stable at 1.1423.

The rate cut, while largely anticipated, indicates the ECB’s confidence that price pressures are easing in line with internal targets. Lagarde’s position remains methodical, favouring a meeting-by-meeting strategy without offering any set trajectory. That choice emphasises a desire to preserve flexibility rather than lock into a course that might not suit future data.

From our standpoint, price forecasts holding firm suggest policymakers believe the current level of economic momentum is enough to support growth while steadily bringing inflation back within target. The lighter inflation outlook for 2026, dipping to 1.6%, reinforces this. Meanwhile, the minor pickup in GDP growth over the next two years, though modest, contributes to the case that the rate cut is more of a fine-tuning measure rather than a response to acute risk.

Market Expectations and Strategy

None of this points to aggressive easing ahead. Earnings growth remains monitored, and services inflation, while coming down, still warrants attention in core figures. The euro’s strength against the dollar softens import costs, reducing pressure on headline inflation, but may tighten financial conditions more than desired if it persists.

Given these details, there’s a suggestion of rangebound market expectations for the near term. Rate cut pricing has crept in gradually and looks to be largely accounted for in interest rate futures. Unless data diverges clearly from projections—whether by way of a growth slowdown or a re-acceleration in core price components—volatility should stay compressed.

Expect more sensitivity on the short end than at the belly or long tenors. Rates swaps and STIR contracts may experience minor repricing following second-tier surprises in inflation readings, but a broad shift in the curve will likely require a change in the forward guidance language or a break in the current data rhythm. There’s an opportunity here to lean into flatteners within a defined range, particularly across September and December contracts.

With that in mind, scalping short-dated gamma looks less appealing than maintaining neutral vega until more persuasive directional signals emerge. The lack of movement in EUR/USD affirms that FX vol sellers aren’t being challenged, and that theme is unlikely to shift unless US data drives policy divergence stateside, which would not be captured in rate differentials alone.

In summary, underlying assumptions remain intact—economic conditions broadly stable, inflation retreating toward target. The ECB has not added urgency, nor have they removed options. This environment continues to favour tactical approaches led by inflation developments and real yield adjustments, especially in ultra-short horizon positioning.

Create your live VT Markets account and start trading now.