ECB policymaker Edward Scicluna stated that current interest rates are fitting, with inflation expected to be just below 2%. He highlighted a neutral policy, suggesting no need for changes unless circumstances shift. Scicluna mentioned that inflation might not exactly hit 2%. He predicted a 1.9% inflation rate for 2027, which he said is not a concern. He maintained that any policy changes would only occur if there are significant changes in economic conditions.

ECB Colleagues Share Similar Views

In Copenhagen, other ECB officials echoed these thoughts on interest rates. Stournaras from Greece feels rates are in a “good equilibrium,” noting that inflation just below 2% doesn’t require further cuts. Kazaks from Latvia agrees, saying the current rates are suitable, even accepting minor fluctuations around the target. Kazaks added that while it’s unlikely there will be a rate cut in October, December could bring a review if new data supports it. Despite trade tensions and shifts in the euro, Scicluna trusts that the economy’s strength and fiscal spending support a steady policy, acting only if major changes arise. Overall, it seems interest rates will likely stay stable through autumn. The market has considered a slight chance of a rate cut by December, but these comments indicate that a cut is not likely. Consequently, short-term interest rate futures betting on lower rates seem pricey right now.

Policy Implications and Market Reactions

This steady policy is expected to support the euro since there’s no immediate push to cut rates and weaken it. With policymakers stressing stability, implied volatility in euro currency options might decrease further from already low levels. Selling this volatility using strategies like short strangles may be beneficial if the euro stays within a certain range. This outlook aligns with recent data, showing that August’s core inflation rate for the Eurozone was 1.9%, matching the central bank’s target. Additionally, the economy grew by a modest 0.3% in the second quarter, reflecting the resilience policymakers have referenced. This steady environment contrasts sharply with the aggressive rate changes seen in 2023 and 2024. For equity derivatives, this consistent policy removes a significant risk factor for the market. A stable interest rate climate supports stock valuations, suggesting limited short-term downsides for indices like the Euro Stoxx 50. We could see measures of market volatility, such as the VSTOXX index, currently around 15, drift even lower in the coming weeks. Create your live VT Markets account and start trading now.

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