The recent ECB survey of professional forecasters for the third quarter of 2025 shows a drop in expected inflation rates. Inflation for 2025 is estimated at 2.0%, down from 2.2%. For 2026, inflation is expected to fall to 1.8%, a decrease from the previous 2.0% forecast. The survey also touches on economic growth, with a positive update for GDP growth in 2025. It is now projected to be 1.1%, up from an earlier estimate of 0.9%. However, the GDP growth forecast for 2026 has been revised down to 1.1% from 1.2%.

Long Term Inflation Forecast

The long-term inflation forecast remains steady at 2%, which aligns with the European Central Bank’s target for medium-term inflation. These updated projections give insight into expected future economic conditions, focusing on inflation and growth. With the new survey data, it seems the European Central Bank can start lowering interest rates. The expected decrease in inflation to the 2.0% target for 2025 provides enough reason for policymakers to ease monetary policy. This view is supported by recent statistics showing Euro area inflation cooled to 2.4% in April 2024. In the coming weeks, we will focus on interest rate derivatives that benefit from falling rates. We plan to enter into receive-fixed interest rate swaps and buy futures contracts based on Euribor. This strategy prepares our portfolio for the anticipated rate cut in June and possible further cuts later this year.

Opportunities and Market Strategies

Comments from key officials suggest a cautious approach to easing. President Lagarde has hinted strongly at a move next month but is non-committal about future actions. This opens up an opportunity, as the market may be underestimating the number of cuts needed to address the disinflation trend highlighted in the new survey. The 2026 inflation outlook, now at 1.8%, is crucial for our strategy. This figure, falling below the target, indicates the ECB might need to be more aggressive in easing than previously thought. We see potential in options strategies that bet on quicker rate reductions through late 2024 and into 2025. Slow economic growth also supports the central bank’s need for action. The modest 1.1% GDP growth forecast aligns with recent data, such as the HCOB Eurozone Manufacturing PMI, which remained below growth territory at 47.3 in May. A weak economy cannot sustain high interest rates, reinforcing our negative view on rates. Historically, when the ECB has started an easing cycle amid weak growth, it usually doesn’t stop at just one or two cuts. The central bank tends to continue easing until there is significant economic improvement. We expect this trend to continue, making long-term positions for lower rates appealing. This interest rate gap could negatively impact the Euro’s value. Therefore, we will also consider strategies to short the Euro against the US Dollar. Buying put options on the EUR/USD offers a cost-effective way to speculate on a weaker Euro due to a more dovish central bank. Create your live VT Markets account and start trading now.

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