Yannis Stournaras, an ECB policymaker, indicated that monetary policy may become less restrictive in 2025.
However, a potential rise in inflation could postpone the normalisation of monetary policy.
Expected Rate Cut Announcement
The ECB is expected to announce a 25 basis points rate cut in the upcoming week.
That Stournaras suggested a move towards easier monetary policy in 2025 points to a growing confidence among some decision-makers at the European Central Bank that inflationary pressures might remain under control over the medium term. The idea is straightforward: if inflation stabilises near the 2% target, there is little sense in having borrowing costs remain at restrictive levels for longer than needed.
That said, inflation isn’t a tame animal yet. There remains a strong chance that price growth picks up again — particularly if wage gains outpace productivity or if energy prices creep upward. If that were to happen, the anticipated pathway toward policy loosening becomes trickier. In that scenario, reducing interest rates could be seen as adding fuel to smouldering inflation, something the ECB would be reluctant to do. Hence, rate cuts would likely be shifted further down the calendar or paused after one or two steps.
Next week’s expected 25 basis point reduction would be the first lower move in the cycle — a policy shift that many took for granted in earlier months, but now comes loaded with conditionality. Our reading of the market implies that while the initial cut will be delivered, future steps beyond that will be heavily influenced by how data prints over the summer. This isn’t just about headline rates either; the focus will be on the stickier parts of inflation, such as services, where trends point to persistent strength.
Assessing Economic Data Impact
Looking at forward pricing, we have seen some re-pricing of expectations, with fewer cuts now priced in compared to the start of the year. Traders adjusted their positions accordingly; open interest and implied volatility tell a similar story. That alone suggests a more tactical approach is needed.
We remain mindful of how sharply expectations can shift based on revised inflation figures and comments from governing council members. For now, the theme is one of conditional easing — not driven by optimism, but by the belief that current restrictions are slightly overdone if inflation remains soft.
In light of this, short-end interest rate contracts may offer a fairly tradeable channel, particularly in response to monthly inflation readings and wage data. Directional trades might carry more risk over the next few weeks, given the increased event sensitivity and finite room for error in positioning. We’d argue that spread trades across central banks — especially between the ECB and peers who are further behind in their tightening cycles — could find renewed relevance.
This week’s messaging may offer one leg of the trade. But make no mistake, it is the upcoming economic data — particularly from Germany and Spain — and how it challenges or supports current conviction across policymakers, that may past the biggest impact on forward guidance.
