Trump’s tariffs complicating ECB’s interest rate outlook

U.S. President Donald Trump’s tariff policies are complicating the future path for European Central Bank interest rates, according to Pierre Wunsch, a member of the ECB’s Governing Council and Governor of the National Bank of Belgium. 

At the IIF Europe Summit in Brussels on Thursday, Wunsch said that without tariffs, the outlook for ECB policy looked on track, but the new trade measures now add uncertainty to the equation. “We were going in the right direction. And I was actually quite relaxed,” Wunsch told CNBC’s Karen Tso. 

He explained that if tariffs were not part of the picture, the situation would have been more about fine-tuning the pace of rate cuts and finding a stable landing point for policy adjustments. Instead, the additional layer of tariffs has complicated what would have otherwise been a predictable policy course.

Wunsch was clear in noting that tariffs would likely be bad for economic growth and could be inflationary. However, he cautioned that the precise impact remains uncertain. 

The effects will depend on factors such as possible retaliatory measures from other countries and the way exchange rates adjust to the new duties imposed by the United States.

These comments come just a day after President Trump announced a 25% tariff on all cars “not made in the United States.” This new measure is set to take effect on April 2. 

In a post on the social media platform Truth Social, Trump also warned that he might impose “far larger” tariffs on the European Union and Canada if they join forces to oppose U.S. duties. 

While the exact details and future adjustments remain fluid, April 2 is now marked as a key date when a wide range of duties will come into effect.

The ECB is scheduled to finalize interest rates on 17th April

The timing of these tariff measures could have significant implications for the ECB. The central bank is scheduled to make its next interest rate decision on April 17. A

At present, market data from LSEG indicates that there is roughly a 79% chance of a 25-basis-point interest rate cut by the ECB next month. By that time, Wunsch said, the ECB should have a better idea of how the tariffs are affecting the economy, and this could play a role in the bank’s decision making.

Wunsch added that while the trade policy may not have an immediate effect, it will certainly have a medium-term impact. 

According to him, the ECB would likely consider pausing rate cuts if tariffs result in reduced growth and inflationary pressures. It is still unlikely that the bank would have to hike rates in the near term. He said, “I think the likelihood is still limited that we would have to hike, but there might be a case for a pause.” 

In addition to trade policy, Wunsch also pointed to shifts in fiscal policy within Europe that might help counterbalance the negative effects of the tariffs. Earlier this month, Germany adjusted its constitution in a move described as a fiscal U-turn. 

The changes allowed for higher defense spending and resulted in the creation of a 500 billion euro infrastructure special fund. At the same time, the European Commission has indicated plans to mobilize up to 800 billion euros for a major defense expenditures package aimed at boosting security spending across the bloc.

Wunsch said that the measures taken by Germany could, to some extent, or perhaps even largely, help offset the negative economic impact of the U.S. tariffs over the medium term. 

If fiscal expansion manages to balance out the trade disruptions, the main remaining risk from the tariffs could be an upward pressure on inflation. 

He warned that “the risk might be on the upside on the inflation front,” indicating that while fiscal policy might cushion the growth outlook, the inflationary effects could still pose a challenge for the ECB.

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