ECB executive board member Isabel Schnabel shares her thoughts on the current monetary policy. She believes in a steady approach, warning that inflation risks are starting to increase. Factors driving inflation include tariffs, services, food, and fiscal policy, with tariffs likely adding to supply chain inflation. The euro area’s economic growth is expected to exceed potential growth rates. However, the influence of a stronger euro is likely to be minimal. Schnabel’s comments reflect ECB President Lagarde’s recent remarks that risk levels are now more balanced, moving away from previous concerns about economic downturns.

Possibility of Rate Changes

The European Central Bank seems to indicate that interest rates will stay the same for a while. However, the key takeaway is that the next change is more likely to be an increase, not a decrease. This means the market’s expectations for rate cuts in late 2025 or early 2026 may be misguided. This outlook is based on growing inflation risks. August 2025 inflation data for the Euro area came in at a stubborn 2.4%, with the services sector still above 4%. These figures suggest that the battle against inflation is far from over. Moreover, new tariffs from ongoing trade disputes could raise business costs. The Eurozone economy grew faster than expected in the second quarter of 2025, at 0.5%, leaving little reason for the bank to consider cutting rates. Given this environment, holding long positions in the euro could be advantageous compared to currencies from central banks with more lenient policies.

Similarities to Prior Economic Conditions

This situation mirrors what we experienced in late 2021 when officials hinted at a pause before needing to tackle persistent inflation later on. Right now, the market is only anticipating a slight chance of a rate hike by next spring, which seems too low given the current data and commentary. Thus, it makes sense to prepare for higher interest rates for a longer period. This might involve selling futures contracts on the Euro Interbank Offered Rate (Euribor) set for mid-2026. At the same time, bond market volatility is expected to increase, so buying options like straddles on German bund futures could be a smart strategy to navigate this uncertainty. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now