ECB Rate-Cutting Plans Survive First Contact With Trump’s Return

Plans by the European Central Bank to push ahead with interest-rate cuts are withstanding the early jolts in US economic policy driven by Donald Trump’s return to the White House.

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Bloomberg News

Alexander Weber, Mark Schroers and Jana Randow

Published Jan 22, 2025  •  3 minute read

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(Bloomberg) — Plans by the European Central Bank to push ahead with interest-rate cuts are withstanding the early jolts in US economic policy driven by Donald Trump’s return to the White House.

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Speaking during the World Economic Forum in Davos, Switzerland, officials including President Christine Lagarde said euro-zone inflation remains primed to hit 2% this year, allowing them to further loosen the shackles on the faltering economy.

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It’s not that Trump’s early inaction on Europe means the danger has passed. On Tuesday, he ominously described the European Union as “very, very bad” to the US on trade. But the ECB won’t react unless there’s concrete action on tariffs. What’s more, policymakers in Frankfurt are optimistic that any fallout for prices would be limited, letting them continue with quarter-point rate cuts each time they convene.

“I am vigilant but not worried about inflation — including the effect of Mr. Trump’s policies,” Bank of France Governor Francois Villeroy de Galhau told Bloomberg Television’s Francine Lacqua. “There’s a plausible consensus that we will go on acting at each meeting, which we have successfully practiced since September.”

The ECB will probably lower borrowing costs by another quarter-point on Jan. 30, adding to four such moves last year that took the deposit rate to 3%. Investors and analysts see further steps in the months ahead, until the ECB reaches a level that neither constricts nor stimulates economic activity.

Most policymakers remain hesitant to offer predictions beyond the next two meetings, not least with much of Trump’s agenda still unclear. But crafting any kind of response with so much still unknown — including possible counter-measures by the EU and China — isn’t easy.

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“The most difficult thing to calibrate is even the impact of tariffs because it depends very much on the reaction of third countries,” Spanish central-bank chief Jose Luis Escriva told Bloomberg TV. The ECB’s instruments to analyze the situation “are not sufficiently reliable,” he said.

Lagarde acknowledged that there’ll be “interesting phenomena” to watch, including exchange rates. But if tariffs on goods entering the US stoke prices there, it would mostly be a concern for the Federal Reserve, she said.

“That’s where the first and prime consequences will be,” she told CNBC on Wednesday. In Europe, “the disinflationary process continues and we are not overly concerned by the sort of export of inflation.”

The Fed will have to respond to any gyrations in US prices, with the ECB remaining on alert due but closely monitoring knock-on effects via incoming data, Bundesbank President Joachim Nagel said.

Consumer price-growth in the 20-nation euro area quickened to 2.4% in December — a development officials anticipated because of volatile energy costs. There’s also growing confidence that stubbornly high services inflation will abate as wage pressures ease.

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By contrast, the economy has repeatedly disappointed, not least because German output just contracted for a second straight year. Trade disruptions could further hit struggling exporters, which some policymakers say would outweigh upward pressure on prices.

“Looking at Trump’s policies, I’m more concerned about the likely negative consequences for growth in Europe than potential inflationary effects,” Slovak central-bank governor Peter Kazimir told Bloomberg on Monday.

His Dutch counterpart, Klaas Knot, said it’s “pretty clear” the impact would be negative for growth, but “not so clear” when it comes to consumer prices.

What Bloomberg Economics Says…

“For the European economy, we estimate a 10% tariff would lower exports to the US by 30% and a 25% tariff by 70%, putting between 0.7% and 1.5% of GDP at risk.”

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All that leaves the monetary loosening penciled in for this year in place, with ground still to cover until rates hit the so-called neutral point that neither stimulates nor holds back the economy.

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While the precise level is hard to observe in real time, Lagarde offered an estimate of 1.75%-2.25%, implying at least three more quarter-point moves. For now, most seem on board with such a trajectory, though Trump’s lack of action on Europe leaves open the possibility of an unwelcome shock down the line.

“It doesn’t mean to say that it will not happen,” Lagarde said. “I think that it’ll be a more selective, focused development that we will see in the next few days or weeks. But I think what we need to do here in Europe is to be prepared and anticipate what will happen in order to respond.”

—With assistance from James Regan.

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