The European Central Bank’s Nagel has warned that further rate cuts could threaten price stability. The ECB decided to keep rates steady, marking the second month in a row that they have made this choice.

ECB Officials Perspectives

After the meeting, ECB officials had different views. Rehn raised concerns about inflation risks tied to cheaper energy and a stronger euro, pointing out that the ECB’s inflation forecast for 2026 is 1.7% y/y, below the target of 2%. Kocher noted that Austria’s inflation is higher than the eurozone average and emphasized that decisions will be made on a case-by-case basis. Muller expressed satisfaction with current interest rates, suggesting he is comfortable with the ECB’s strategy. Kazaks agreed with a meeting-by-meeting approach, given the existing risks, and mentioned important discussions are expected in December. Villeroy hinted at the possibility of rate cuts in the future, as he is more concerned about inflation risks falling below target than about rising inflation. Simkus observed that inflation is now stable at targeted levels, coupled with a strong job market and improved economic activity. However, he warned that inflation risks are still quite high, indicating a need for ongoing caution. The European Central Bank is clearly divided after holding interest rates steady for the second straight month. This split between those focused on inflation risks and those fearing weak growth creates significant uncertainty. We must closely monitor upcoming economic data, as it could heavily influence future policy choices.

Outlook and Strategies for Traders

We must pay attention to hawks like Nagel, especially as the latest August 2025 inflation data shows the Harmonised Index of Consumer Prices (HICP) at 2.1%. This figure is slightly above the ECB’s 2% target, strengthening arguments against further rate cuts. This explains the bank’s choice to pause after lowering rates in June and July. However, doves have valid arguments too. They point to modest GDP growth of only 0.4% in Q2 2025 and potential risks from energy prices, as Brent crude recently dropped below $75 a barrel. This supports Villeroy’s argument for keeping the option for another rate cut open. This fundamental disagreement could lead to increased volatility in interest rate markets. For traders, this division suggests that implied volatility on EUR interest rate options might be underestimated. A possible strategy could be buying straddles on short-term EURIBOR futures, which would profit from a significant rate change in either direction. Any unexpected inflation or growth news could lead to major market adjustments before the crucial December meeting. With futures markets currently estimating only about a 30% chance of a rate cut by December, there may be an opportunity to prepare for a dovish surprise. We could consider purchasing inexpensive, out-of-the-money put options on the EUR/USD exchange rate. This offers a low-cost way to profit if disappointing economic data pushes the ECB to cut rates sooner than anticipated. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now