From the Impact of Trump's Tariffs to the Dispute over Russian Assets: Five Questions on the European Central Bank's Monetary Policy Path

According to the Zhitong Finance APP, traders in the current interest rate futures market are indecisive about whether the European Central Bank (ECB) will restart its easing policy next year. However, these traders generally bet that the ECB is likely to announce on Thursday that it will remain on hold, continuing to pause its rate cuts. The renewed tensions in U.S.-China trade at the beginning of October had kept global financial markets cautious, but strong economic data from the Eurozone and positive signs of progress towards an agreement between the U.S. and China mean that traders have once again reduced their bets on rate cuts.

Current market pricing shows a very high probability that the ECB will remain on hold on Thursday, as the impact of the tariff policies initiated by the Trump administration on the Eurozone economy is still to be observed. However, the market remains uncertain about whether the ECB will resume its rate-cutting process next year.

For the ECB, here are five key questions that financial market traders are focused on:

1/ What action will the ECB take this week?

Traders expect the ECB to announce at the interest rate decision on October 30 that it will keep the benchmark interest rate at 2% for three consecutive monetary policy meetings.

This expectation has changed little since September, when ECB policymakers generally indicated that the Eurozone economy remains in a "good position." They have not yet seen the full impact of U.S. tariff policies, and the euro's exchange rate, which has risen by 12% this year (which is likely to suppress inflation), has significantly retreated.

"This is just a transitional monetary policy meeting. A more important one will be in mid-December," said Reinhard Cluse, Chief European Economist at UBS.

The line chart shows the changes in the ECB's benchmark deposit rate from January 1999 to June 2025, marking each specific rate-cutting cycle. The latest round of rate cuts lasts from June 2024 to September 2025.

2/ With the latest data showing inflation returning above the 2% target, will the ECB continue to worry?

Overall, the latest stance revealed by ECB policymakers shows that they are not concerned about Eurozone inflation remaining persistently above the ECB's anchored 2% target. In September, Eurozone inflation unexpectedly rose to 2.2%, the first time since April that it exceeded the central bank's anchored 2% target, mainly due to rising service prices and a slowdown in energy cost declines.

This outcome aligns with economists' general expectations. The ECB expects overall Eurozone inflation to fall to 1.7% next year and remain below the 2% inflation target until mid-2027.

The minutes from the ECB's September monetary policy meeting indicate that policymakers generally believe inflation risks are roughly balanced, but more monetary policy decision-makers seem to be more concerned about the risk of weakening inflation rather than inflation continuing to strengthen.

Paul Hollingsworth, Head of Developed Markets Economics at BNP Paribas, stated, "Short-term inflation risks are skewed to the downside due to a stronger euro and deflationary shocks from Asian exports." He refers here to the risk that exporting countries in the Asian region may dump excess exports into the European market.

He added that the upward risks brought about by Germany's fiscal stimulus policies are more skewed towards the medium term rather than the short term.

The above line chart shows the overall inflation, service sector inflation, and core inflation in the Eurozone from 2021 to September 2025, represented in blue, yellow, and red respectively. All three have risen in the latest month, with overall inflation returning to above 2%.

3/ Why are traders in the financial markets repeatedly at odds over the interest rate cut expectations for 2026?

Earlier this month, U.S. President Donald Trump announced additional tariff policies on Chinese imports, initially raising market concerns about a significant escalation in trade risks.

As a result, compared to September, there was a huge shift, with traders pricing in about an 80% probability of a renewed interest rate cut cycle in 2026; previously, the European Central Bank's strong stance had led the market to eliminate such expectations.

However, last week's data showed that the Eurozone economy is regaining growth momentum, and Trump's statement that he hopes to reach a positive and mutually agreeable trade agreement with China this week prompted traders to again lower their bets on restarting the interest rate cut cycle in 2026.

Interest rate futures traders currently expect that by the end of 2026, the probability of the European Central Bank restarting the interest rate cut cycle is slightly below 50%.

The above chart shows how market expectations for the European Central Bank's interest rate cuts have changed since September.

4/ Economic uncertainty remains high. What does this mean for the European Central Bank's monetary policy expectations?

This highlights why the European Central Bank's monetary policy decision-makers have not closed the door on further interest rate cuts.

Philip Lane, the chief economist of the European Central Bank, stated that the risks of economic downturn will strengthen the case for "slightly lower" interest rates, while upward factors support the European Central Bank's inaction. He also warned that if dollar financing dries up, banks in the Eurozone may face liquidity pressures.

Some economists claim that the impact of U.S. tariff policies and the potential escalation of trade tensions remain the main downside risks facing the Eurozone economy.

Cluse from UBS stated that a further strengthening of the euro exchange rate and slower-than-expected implementation of German stimulus could also prompt the European Central Bank to restart interest rate cuts.

European Central Bank policymakers have also indicated that the continued rise in stock market valuations driven by artificial intelligence increases the risk of sudden repricing in global financial markets, which could harm the Eurozone economy The uncertainty of France's budget policy is unlikely to sway the European Central Bank's monetary policy thoughts, but the latest actions of the Socialist Party have once again increased the risk of the French government collapsing last Friday.

Fiscal concerns and U.S. tariffs have affected the pricing of sovereign bonds in the Eurozone for 2025; the chart above shows the changes in the yields of U.S. and Eurozone 10-year government bonds.

5/ What is the European Central Bank's policy stance in the discussion of using frozen Russian assets to aid Ukraine?

The European Central Bank does not have an official voice, but at a time when there is an opportunity to enhance the global influence of the euro, the ECB does not want the credibility of the euro as a sovereign currency to be damaged, which will not have a substantial impact on the expectations of ECB monetary policy.

Some EU member state governments hope to invest the Russian cash assets held in the Euroclear custody in Belgium, which are from matured Russian bonds, into zero-coupon bonds issued by the EU, and then use the proceeds to provide loan support to Ukraine.

However, the Russian government will still retain claims and ownership over these assets, thus avoiding complete confiscation—this is the most negative scenario for the euro. Russia has stated that it will respond "painfully" to any such actions.

ECB President Christine Lagarde stated that the EU must comply with international law in this process, and she prefers that all countries holding Russian assets and cash also provide loan support to Ukraine.

However, this idea was shelved last Thursday and will be discussed again in December.

Morgan Stanley's Chief European Economist Jens Eisenschmidt stated that ultimately, factors such as defense industrial capabilities and the limited depth of the Eurozone capital markets play a more decisive role in the euro's status as a global reserve currency