The European Central Bank (ECB) is keeping interest rates steady at 2% as inflation is on target, according to Martins Kazaks, a member of the Governing Council. He believes it is wise to watch the economy without making further changes to policy. The risks from tariffs and Chinese imports are balanced by improvements in manufacturing and slower wage growth. After eight rate cuts, the ECB ended its easing cycle in July and held the deposit rate at 2%. Officials indicate that no changes will happen in the upcoming meeting in September. Although there are challenges like a 15% tariff on EU exports to the U.S. and issues with Chinese goods, business surveys are showing positive trends in manufacturing, which supports stable inflation expectations.

Inflation Projections

Projections suggest that inflation may drop below the target early next year but is expected to bounce back. Predictions indicate it will be 1.6% in 2026 and return to 2% by 2027. Current market views agree with keeping rates steady, seeing any possible 25 basis point cut as more symbolic than impactful. Some reports also hint that the ECB could lower rates again in 2025, with the next meeting scheduled for September 11. With the ECB clearly pausing its rate changes, we should focus less on bold directional bets. The deposit rate remains at 2% after the end of the easing cycle in July, indicating a period of observation. This scenario suggests that options strategies benefiting from low volatility, like selling straddles on Euribor futures, might be advantageous leading up to the September meeting. This cautious approach is supported by recent data. Eurostat’s preliminary estimate for August 2025 inflation was 1.9%, nearly at the ECB’s target. Additionally, the August HCOB Manufacturing PMI for the Eurozone rose to 48.5, marking the fourth consecutive monthly improvement from the lows recorded in late 2024. These positive indicators give the ECB little reason to act quickly at their next meeting on September 11.

Monitoring Economic Risks

It’s important to keep an eye on potential risks such as U.S. tariffs and the downward pressure from inexpensive Chinese imports. However, these concerns are mitigated by easing wage pressures. Recent data shows that negotiated wage growth slowed to 3.8% in the second quarter of 2025, down from 4.7% in 2024. This trend supports the view that inflation can remain stable without further intervention. The market has already accounted for this stability, as futures contracts on the Euro Short-Term Rate (€STR) indicate less than a 15% chance of a rate cut in September. With expectations for inflation to drop to 1.6% in 2026, any notable policy changes are likely to be discussed later this year or early next. For now, preparing for a stable market in the coming weeks appears to be the best strategy. Create your live VT Markets account and start trading now.

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