EUROPEAN Central Bank policymakers are likely breathing a sigh of relief that the new US administration did not impose the blanket trade tariffs some had feared and a rate cut next week now seems like a done deal.
Trade Tariffs: A Sigh of Relief for the ECB
US President Donald Trump held back from imposing trade barriers on his first day in office on Monday (Jan 20) and even his threats steered clear of Europe, pushing up the euro, dragging down oil prices, lowering yields and firming bets that the ECB can continue cutting rates.
Inflation Concerns
Financial investors have been pricing out ECB rate cuts in recent weeks on fears that the strong US dollar, rising energy costs and retaliatory trade measures from the EU would all push up domestic inflation, dealing another blow to the bank’s efforts to get price growth back to 2 per cent.
Market Bets
Investors had braced for the worst possible outcome, including the announcement of universal tariffs, and were relieved when even the rhetoric was mostly focused on Mexico, Canada, and China.
Rate Cut Expectations
“Most of the comments were related to ‘America’s first’ policy, but the initial comments appear better than feared by the market,” Mohit Kumar at Jefferies said.
“Our view remains that the ECB will cut – by 25bp each – in January and March”, Kumar said. “Then if the data comes in line with expectations, we could see a skip for the April meeting, with the following cut in June.”
Conclusion
In conclusion, the EU is likely to breathe a sigh of relief with the new US administration’s decision not to impose blanket trade tariffs. The strong US dollar’s relentless rally and the possibility of retaliatory trade measures from the EU had earlier priced out rate cuts from the ECB. However, with Trump’s initial comments focusing on other countries, market bets have swung back in favor of rate cuts, with some predicting four cuts from the ECB this year.
FAQs
Q: Why did investors previously price out ECB rate cuts?
A: Investors had priced out ECB rate cuts due to concerns about the strong US dollar, rising energy costs, and potential retaliatory trade measures from the EU, which could have boosted domestic inflation and made it challenging for the ECB to achieve its 2% inflation target.
Q: How did Trump’s initial comments impact the market?
A: Trump’s initial comments, which focused on Mexico, Canada, and China, rather than the EU, led to a relief rally, pushing up the euro, and lowering yields and oil prices.
Q: Will the ECB cut rates again this year?
A: Yes, some economists are predicting that the ECB will cut rates again this year, citing the potential impact of Trump’s policies on the euro area growth outlook.
Q: Can Trump’s policies weaken the EU’s current account surplus?
A: Yes, some economists argue that Trump’s policies, such as tariffs, could weaken the EU’s current account surplus, leading to a more deflationary environment, which could offset the inflationary impact of new duties.
