ECB official Villeroy indicated that there remains potential for further policy easing, although the degree of this easing is open to discussion. Current market expectations suggest a 2% deposit rate could be reached by the end of summer 2025.
The market is currently pricing in a rate of 1.97% for September, with expectations of a decline shortly thereafter. Central bankers are withholding information until they gain more clarity regarding tariffs.
Uncertainty In Policy Direction
Villeroy’s comments suggest that while additional rate cuts may be possible, policymakers are not committing to a specific path yet. The market has already positioned itself for a lower deposit rate, hovering around 1.97% by September next year, reinforcing expectations of a continued loosening cycle. However, beyond that point, there appears to be some uncertainty.
At the heart of this uncertainty is a lack of detail from central bankers, who seem to be waiting for more information before refining their outlook. Trade policies remain a key unknown, and until better clarity emerges, officials are holding back from making strong commitments. This measured approach indicates that while easing remains on the table, monetary authorities are not in a rush to provide further guidance.
From a trading perspective, this cautious stance suggests that expectations for rate reductions should be handled with care. Without more explicit indications from policymakers, making firm bets on deeper cuts carries more risk. The pricing of future moves may shift quickly should central bankers offer new details or external factors—such as tariffs—change the broader picture.
Market Reactions And Future Expectations
For now, the market appears relatively aligned with the prospect of gradual easing through next year. However, the lack of a firm stance from policymakers leaves room for adjustments, creating potential volatility if expectations need to be recalibrated. Those with exposure to rate movements should be watching for any fresh signals that could alter projected outcomes.
