The European Central Bank’s policymaker, Escriva, highlighted the need for flexibility in monetary policy. While the main scenario is developing as expected, some uncertainty remains. Escriva mentioned that disinflation efforts are working well, noting how complicated the situation was two or three years ago. The ECB sees the current interest rate of 2% as appropriate.

Inflation Risks

The risks to inflation appear balanced, although there may be a slight negative effect on growth. During an event, Escriva stressed the ECB’s neutral position, indicating that the bank is prepared to adjust if needed but is unlikely to respond to small deviations from targets unless unexpected events occur. With the European Central Bank maintaining a neutral stance, there seems to be little reason to change the current 2% interest rate in the near future. The latest flash estimate for Eurozone inflation in August 2025 is 2.2%, which is close to the target and doesn’t prompt a policy change. This suggests that interest rate fluctuations will likely stay low for now. In this situation, it may be smart to sell options to earn premium, as implied volatility might be higher than actual volatility. For example, strategies like selling straddles on short-term EURIBOR futures could be used, betting that rates will remain stable. However, this strategy carries significant risks if there is an unexpected economic shock.

Main Risk to Stability

The biggest threat to this stable outlook is the central bank’s willingness to change direction. Any unanticipated geopolitical event or sudden rise in energy prices could quickly alter this balance and lead to a policy response. Therefore, holding some inexpensive out-of-the-money options might be a wise way to protect against sudden market changes. We are also monitoring the tension between slow economic growth and a tight labor market. The GDP growth for the second quarter of 2025 is only 0.1%, while unemployment is at a low of 6.3%. This puts the ECB in a challenging position. If forward-looking indicators like the Purchasing Managers’ Index (PMI) worsen further, it could lead to future rate cuts. Reflecting on the past, we recall the sharp rate hikes in 2023 that were necessary to combat high inflation. The following trend of disinflation enabled a series of cuts that brought us to the current 2% rate. This history serves as a reminder that while things seem stable now, the central bank is ready to act if the data changes. Create your live VT Markets account and start trading now.

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