The new president’s second term is poised to significantly influence global economic policy, primarily through trade tariffs, tax cuts, and a stronger dollar. These changes are likely to affect inflation rates and interest rates worldwide. While the Federal Reserve may hold or tighten interest rates, the European Central Bank (ECB) is expected to lower rates further as eurozone growth stagnates.
With the swearing-in of Donald Trump as the 47th president of the United States, a new era in economic policy is beginning. His administration’s agenda emphasizes substantial trade tariffs, reduced corporate tax rates, strict immigration controls, and increased demands on NATO allies. These elements could lead to considerable repercussions for growth, inflation, and interest rates, not just within the United States but across the globe.
Impact of ECB Rate Cuts Amid US Policies
The policies set forth by the new administration are anticipated to steer the European Central Bank’s monetary strategies in the forthcoming months, potentially fast-tracking rate cuts and influencing currency exchange rates. Economists forecast a growing divergence between US and eurozone monetary policies. While the Fed is likely to maintain or even increase interest rates to address inflationary pressures, the ECB may continue its trend of rate reductions.
According to Hélène Baudchon, a senior economist at BNP Paribas, the inflationary impact of “Trumponomics”—a combination of trade protectionism and expansive fiscal policies—could prompt the Fed to keep interest rates steady or raise them to combat ongoing inflation concerns. In contrast, she suggests that eurozone growth will remain subdued, allowing the ECB to pursue further rate cuts and work towards achieving the 2% inflation target.
Bank of America economist Ruben Segura-Cayuela warns that the introduction of a 10% tariff on imports from the European Union could negatively affect eurozone economic activity, potentially reducing GDP by 0.4 to 0.5 percentage points. If uncertainties surrounding tariffs escalate, the ECB might need to implement more aggressive rate cuts.
Tariffs’ Influence on Eurozone Inflation and Currency
The path of ECB interest rates is closely tied to the implementation and effects of Trump’s trade policies and their repercussions on the European economy. CaixaBank notes that the ECB adopts a “data-dependent” strategy, suggesting that its decisions will be significantly influenced by the anticipated outcomes of US economic policies.
Proposed tariffs by Trump, ranging from 10% to as high as 60% on certain imports, are expected to exert inflationary pressure in the US. “Widespread tariffs will tighten inflationary pressures on the United States,” explains Rogier Quaedvlieg, an economist at ABN Amro, pointing out the contradiction with Trump’s pledge to lower inflation.
Dominic Wilson, a Goldman Sachs economist, highlights additional risks for the eurozone, asserting that it is “particularly susceptible” to the instability brought on by new trade barriers. He notes the difficulty in forecasting a coordinated fiscal response given the ongoing political uncertainties in Germany and France, suggesting that a continued easing posture from the ECB is the most likely outcome.
Another probable outcome of Trump’s policies is a stronger US dollar, which could diminish the value of the euro. Goldman Sachs’ foreign exchange analyst Kamakshya Trivedi forecasts a 5% rally in the dollar over the next year due to new tariffs and sustained US economic performance, projecting EUR/USD rates to fall below parity.
The degree of impact from tariffs on the eurozone economy will heavily depend on the ECB’s reaction. The Brussels-based think tank Bruegel warns that the tariffs could act as a “negative supply shock” for the EU. Nonetheless, they also note that factors such as US fiscal stimulus, rising inflation, and a robust dollar might enhance demand for European exports, serving to partially mitigate the negative effects. “The overall macroeconomic impact on the EU will largely hinge on the European Central Bank’s response,” the analysts conclude.
Potential Challenges Ahead for US Economic Growth
Despite Trump’s push for tax cuts and protective trade measures, some economists caution that his economic agenda may create obstacles for US growth. Quaedvlieg at ABN Amro warns that the timing of tariffs could prove detrimental for the economy. “The impact of tariffs may coincide with a precarious moment for the economy, as inflation remains above target and signs of disinflation have stalled,” he explains.
This scenario could compel the Fed to maintain elevated interest rates for an extended period, hindering Trump’s ambitions for robust economic growth. Additionally, he warns that these tariffs could distort global trade and jeopardize recovery efforts in both the eurozone and China.
BNP Paribas economist Baudchon believes the year 2025 may see a narrowing of the growth gap between the US and eurozone as both regions confront trade-related challenges. However, she continues to maintain that inflation rates will likely follow divergent trajectories, resulting in a decoupling of monetary policies.
Photo credit & article inspired by: Euronews
