European top central bank officials warned that the global trade war threatened inflation in the euro zone, which limited the room for currency regions to further reduce interest rates.
Ecb Hawk Isabel Schnabel, a member of the Central Bank's six-member executive committee, said in a speech in the U.S. on Friday night that the surge in protectionism and European defense spending, especially Germany, meant the need to "keep a steady hand and keep a steady pace and maintain its speed close to their place today."
"There are risks, and the lasting and meaningful increase in tariffs will exacerbate upward pressure on potential inflation generated by fiscal spending with higher interim expenses," she said in a speech at Stanford University in California.
All EU exports to the United States face a 20% tax, and the committee chairman Ursula von der Leyen said this week that the group is "preparing for all possibilities".
Schnabel acknowledged that the trade war could also include inflation by meeting demand, depending on the end result of tariff negotiations “is crucial.”
Her remarks challenged the increasingly conditional consensus among economists and investors, who predicted that the ECB would cut another quarter of the ECB at its June meeting. Overall, by the end of the year, traders are betting on two to three such cuts.
Since June, the ECB has lowered borrowing costs by seven steps, with its benchmark interest rate falling from 4% at the time to 2.25%.
Even before U.S. President Donald Trump announced “reciprocity” tariffs for many large trading partners during the “Liberation Day” event on April 2, Schnabel called for discussions about suspending further tax cuts in the euro zone.
In his speech on Friday, Schnabel questioned the emerging view that Trump's trade war could lower rather than rising consumer prices in the euro area - in which case the ECB could strengthen its mitigation of monetary policy to avoid achieving its target of 2% in the medium term.
In April, the euro zone inflation remained stable at 2.2%, surpassing expectations and hovering on its sixth straight month target of 2%.
But many analysts believe that April's data has been distorted by a one-time impact, with inflation expected to decline in the coming months. The euro unexpectedly reinforced the argument after Trump was widely accepted by tariff announcements, which would make the currency cheaper. Oil prices have also fallen sharply, and U.S. exports are expected to take a hit.
But Schnabel said on Friday that in the medium term, higher fiscal spending and the ability of tariffs to reach supply chains mean that the risk of inflation “may tend to rise.”
ECB President Christine Lagarde told reporters in April that the "net impact" of the tariff war on inflation "will only become clearer over time", adding that the quarrels have caused a "negative demand shock" that will have a "some impact" on the growth of the euro zone.