Navigating Euro Area Inflation: Insights on Monetary Policy and Long-term Yield Trends
Euro Area Inflation Pressures Balanced; Rising Long-term Yields Pose Concern
By Dennis Shen, CFA | Published: September 18, 2025, 17:21 GMT
The ECB stayed with the same interest rate. This move shows that the bank watches the economy closely. Inflation stays near 2%, and decision makers see little need for rate cuts now as the economy shows strength amid risks.
Balanced Inflation Environment Amid Economic Resilience
Between June 2024 and June 2025, the ECB cut rates a few times. These cuts still work in the euro area. A new trade agreement between the US and the EU helped ease price pressure. The shift of low-cost goods from China and other regions, caused by higher US tariffs, plays its part too. The euro now grows against the US dollar and other currencies, which adds to lower price trends.
Core inflation, service prices, and wage gains, though lower than before, stay above the bank target. Labor markets stay tight and push prices up. More government spending in Europe—especially in Germany for defense and infrastructure—adds to price pressure. The upcoming EU energy trading regime in 2027 may push prices higher.
Scope Ratings sees inflation near 2.1% for 2025 and 1.9% for 2026. These numbers fall from last year’s 2.4% and from 2023’s high at 5.4%.
Future Monetary Policy: Dependent on Inflation, Growth, and Exchange Rates
Scope Ratings does not see more ECB rate cuts for the rest of 2025. The bank stays ready to change policy if the facts shift. The bias later this year and into 2026 goes to easing rather than raising rates. Any change to the deposit rate, now at 2%, depends on inflation trends, US–EU trade, economic growth, and how currencies move.
The euro is about 13% stronger against the US dollar this year. If it stays past the 1.20 level against the dollar, worries about deflation and less market strength may grow. As a strong reserve currency next to the dollar, the euro rises because the US trade and fiscal plans stay uncertain and US steps try to move the dollar.
US Monetary Policy and Euro Appreciation: Potential Pressure Points
US policy now has more weight. If the US central bank cuts rates along with market pressure, the ECB faces extra work if US and euro area rates move apart. A strong euro may push prices down and force the bank to act.
[Figure 1: Official interest rates (%) with Scope Ratings projections for 2025-2026 show expected US cuts alongside the ECB’s slow hold.]
Rise in Long-term Yields: An Emerging Concern
This year shows a steady climb in long-term euro area bond yields. The baseline view had long rates high for some time. Still, the recent rise shows a new worry for managers. If US rate cuts loosen long-run inflation expectations, euro area long-term yields can climb more and the yield curve may steepen.
The bank will not use major moves in reaction for now. The increase in yields shows market concerns over price trends. These concerns come from rising government spending, more debt, and political strain in countries like France.
The bank’s Transmission Protection Instrument, meant to stop policy gaps, seems unlikely to activate unless deep political trouble in France causes sharp falls in French bonds. Still, if yields jump widely across eurozone countries, the bank might pause its schedule to reduce assets.
[Figure 2: The upward path of 30-year euro area bond yields in 2025 shows a small recent fall.]
Implications for Borrowers and Credit Markets
Rising rates put pressure on global credit. Higher rates make debt harder to pay and limit access for borrowers who need it most. A steeper yield curve makes public and private borrowers try for short-term credit. This choice brings extra rollover and interest risks and may make financial settings even tighter, which can slow economic progress.
For a full summary of economic moves, readers can check the daily economic calendar.
Dennis Shen, CFA, leads the Macro Economic Council and serves as Lead Global Economist at Scope Ratings. Based in Berlin, he brings deep study of sovereign and public sectors, financial institutions, and corporate credit.
Related Articles:
- Federal Reserve Runs Risk of Loosening Before Inflation Is Contained
- UK Services Inflation Softens, Raising Odds of BoE Rate Cut in Q4
- US Dollar Gains Ground as Initial Jobless Claims Drop to 231,000
For more insights, follow us at FXEmpire.
This article gives an analysis based on current economic facts and forecasts as of September 2025. It does not serve as financial advice or recommendations.
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