ECB’s Schnabel says larger costs from tariffs may restrict price cuts | USAEMALL.com

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A top European Central Bank official has warned that global trade wars threaten to push up inflation in the Eurozone, limiting the room for further interest rate cuts in the currency area.

ECB hawk Isabel Schnabel, a member of the central bank’s six-person executive board, said in a speech in the US on Friday night that protectionism and a surge in defence spending in Europe, particularly Germany, meant policymakers needed to “keep a steady hand and maintain rates close to where they are today”.

“There are risks that a lasting and meaningful increase in tariffs will reinforce the upward pressure on underlying inflation arising from higher fiscal spending over the medium term,” she said in the speech at Stanford University in California.

The EU faces a 20 per cent levy on all of its exports to the US, with Commission president Ursula von der Leyen saying this week that the bloc was “preparing for all possibilities”.

Schnabel acknowledged that the trade war could also contain inflation by hitting demand — with the degree of the shock “crucially” depending on the final outcome of tariff negotiations.

Her remarks challenge an increasingly dovish consensus among economists and investors, who forecast that the ECB will make another quarter-point cut at its June meeting. Overall, traders are betting on two or three such cuts by the end of the year.

The ECB has lowered borrowing costs in seven steps since June, bringing its benchmark rate down from 4 per cent to 2.25 per cent over that time.

Even before US President Donald Trump announced “reciprocal” tariffs on many big trading partners at his “liberation day” event on April 2, Schnabel had called for a discussion about pausing further rate cuts in the euro area.

In Friday’s speech, Schnabel took issue with the emerging view that Trump’s trade war may dampen rather than fuel increases in consumer prices in the Euro area — a scenario under which the ECB could step up its monetary policy easing to avoid inflation undershooting its target of 2 per cent over the medium term.

In April, Eurozone inflation held steady at 2.2 per cent, surpassing expectations and hovering above the 2 per cent target for the sixth month in a row.

But many analysts argued that the April data was distorted by one-off effects and expected inflation to come down over the coming months. That argument is underpinned by the unexpected strengthening of the euro in the wake of Trump’s sweeping tariff announcements, which will make imports to the currency area cheaper. Oil prices have also fallen sharply and US exports are expected to take a hit.

But Schnabel argued on Friday that, over the medium term, higher fiscal spending and the capacity for tariffs to hit supply chains meant the risks to inflation were “likely tilted to the upside”.

ECB President Christine Lagarde told journalists in April that the “net impact” of the tariff war on inflation “will only become clearer over the course of time”, adding that the tussle created a “negative demand shock” which will have “some impact on growth” in the Eurozone.