An ECB policymaker has announced that the struggle against inflation is over. It appears that US tariffs are leading to lower prices and affecting monetary policy. Currently, interest rates are going down, a trend expected to continue until 2025. In the Euro Area, inflation may drop to around 1% by early 2026. However, it’s uncertain how quickly these rate changes will happen. We expect all 26 members of the Governing Council to suggest they have successfully managed inflation. Though their views may differ, one member is consistently more lenient in their stance. This article emphasizes two key points: first, an ECB official believes inflation is under control, and second, US tariffs are likely helping to lower prices. Together, these ideas suggest that the pressures pushing prices up are easing for now. We’re seeing a gradual move towards lower interest rates—not a swift change, but a slow adjustment. Predictions indicate this easing could last until 2025 or beyond. If inflation does drop to 1% by early 2026, it would be well below the target, suggesting central banks may keep rates lower for longer. What’s unclear is the speed of these rate changes. We expect comments from all policymakers, many of whom will likely view recent inflation data positively. While their opinions differ, one council member has maintained a more supportive stance, even when others have been more aggressive. Recently, the market has started to expect these rate cuts more confidently, impacting how we position ourselves. If the disinflation trend continues and the ECB becomes less cautious, it may not make sense to hold onto contracts that benefit from tighter policy. We have adjusted our positions accordingly. It’s essential to monitor how volatility behaves in the short term. Current market movements indicate a very slim chance of reversing policy, at least for now. We are preparing for rate cuts as the most likely scenario, with little chance of upward risks. This leads us to favor structural steepeners and reduce hedges based on persistent inflation. Comments from Li are significant due to recent economic data, showing no alarming increases. As energy price effects fade and core inflation gradually weakens, Li’s predictions hold weight in policymaking circles. Other officials have voiced similar opinions, reinforcing the idea that we are on the path to normalization—lower inflation with modest rate actions. Moreover, recent US tariffs are helping to ease up global price pressures. While these moves don’t directly affect local consumption, they do slightly change global cost structures and lower inflation expectations worldwide. For fixed income and rate-sensitive strategies, this reduces one of the few reasons left to worry about repricing risks. Currently, the market accepts below-target inflation as a temporary situation, not a failure. In this environment, we choose not to chase small fluctuations around policy meetings, instead focusing on capturing risk premiums over longer periods. With no surprises expected in press conferences and a stable narrative, the removal of hawkish risks suggests it would take significant data shocks for policies to change. Until then, we will maintain our established structure—low volatility, less focus on immediate data-week premiums, and minimal interest in short-term hawkish shifts. The upcoming timeline is not guaranteed to follow a straight path, but it is clearer than it was a few months ago. For us, this means adjusting to a market that is gradually priced lower, with less expectation for abrupt changes. Our focus will be on timing and carry, rather than policy escalation. The next turning point hasn’t been confirmed yet, so we will hold our positions carefully but confidently.

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