The fear that lingering inflation in the services sector may force the European Central Bank (ECB) to keep interest rates higher for longer has all but been extinguished by Trump’s tariff agenda.
“There won’t be extra inflation. That is a strong guarantee – neither this year nor next year,” says ECB governing council member François Villeroy de Galhau.
Trump’s increasingly protectionist trade policy (apart from the violent stock market swings) has weakened the dollar and strengthened the euro in the process.
This (combined with falling energy prices, also a product of Trump’s trade policy) is already having a disinflationary impact on the euro zone economy.
Hence worries we would see a second surge in inflation have receded.
“Our objective with the ECB is around 2 per cent inflation,” says Villeroy de Galhau. “We are almost there at 2.2 per cent and should meet the objective. And that means something important: we still have a gradual margin for interest rate cuts.”
The ECB is expected to again lower interest rates in June with the incoming shock from tariffs now the chief focus.
But Villeroy de Galhau’s “we have margin for a cut” sentiment might morph into something more urgent if the fallout from tariffs proves stronger than expected and the already flagging euro zone economy falls back into flatline mode as a result of the hit to global trade.
Last week, the International Monetary Fund (IMF) downgraded its euro-zone growth forecast to 0.8 per cent this year, down from 1 per cent.
But the fallout from Washington’s protectionist shift combined with the uncertainty factor (which has prompted a pause in investment) is hard to predict, and no one quite has a handle on it.
An article in the Financial Times highlighted the looming impact on the US economy, with container-port operators and air-freight managers reporting sharp declines in goods transported from China.
Logistics groups say container bookings to the US have fallen sharply since the introduction of 145 per cent tariffs on Chinese imports to the US.
The Port of Los Angeles, the main route of entry for goods from China, expects scheduled arrivals in the week starting May 4th to be a third lower than a year before.
The potential hit to growth from tariffs and trade wars is only emerging.
