The European Central Bank (ECB) has found a neutral interest rate, which is between 1.75% and 2.25%. The bank has decided not to commit to any specific changes in rates in the near future. There is a growing chance that inflation might be lower than expected, which could lead to a rate cut. To gather more data, the ECB will pause any rate changes during the summer and make decisions starting in September. A rate cut could still happen in 2025 if inflation stays below the medium-term target. Many in the market believe a final rate cut might take place in December. This information from the ECB shows that rates have reached a stable point, neither helping nor hindering economic activity. It indicates that current policy is steady, waiting for more signals from the economy. Now, the focus is on observing rather than acting. The ECB is not promising to either cut or raise interest rates next. Instead, they are taking a careful approach, looking at new data as it arrives. Recent inflation data has shown less pressure than expected, reducing the need for further tightening at this time. Indicators for the future, particularly core prices and service inflation, are easing a bit. This decreases the chances of another rate hike. The bigger question now is not if another increase is coming, but whether the expected rate cuts could happen sooner, and under what conditions. Lagarde’s comments highlight that rate decisions will largely depend on the data received in the coming months. During summer, rates will stay the same. This pause gives time to understand wage trends, energy impacts, and consumer demand better. If disinflation continues through the third quarter, December appears to be a likely time for an adjustment. As traders, we should focus less on set meeting dates and more on inflation data from two to three weeks before those meetings. There are delays in reactions, but they are becoming shorter. December pricing now anticipates at least one more 25 basis point cut. This is based on a softer CPI and a more cautious tone from the bank. Investors like Schnabel and Villeroy suggest there is enough flexibility to make changes if inflation continues to fall short. Looking towards 2025, the guidance does not hint at rates rising above current levels, and the trend seems to be downward. For us, this indicates a low chance of rates being tightened again in this cycle. Seasonal inflation patterns, especially the weaker period from July to September, may help maintain the current market expectation of lower rates by the end of the year. Since central bank members have not provided strong forward guidance, shorter-term market volatility will be important. The difference between two and ten-year rates may narrow, especially as long-term holders in EUR seek protection for the fourth quarter. In such an environment, paying close attention to what the ECB says about forecast risks is key. Core inflation and wage trends, not just headline inflation, will be crucial. There are upcoming renegotiations of earnings agreements in France and Germany, and the outcomes will influence the disinflation narrative. We cannot expect consistent viewpoints from all ECB members, as there are still differences within the council. However, the overall message from the June communication is clear: the risks are now balanced but leaning slightly towards a mild expectation of lower policy rates.

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