European Central Bank Rate Cut Likely as Trade War Fears Recede
Following the inauguration of US President Donald Trump, the European Central Bank (ECB) is expected to proceed with a rate cut next week, as concerns over blanket trade tariffs have eased.
Initial rhetoric from the new US administration has focused on imposing barriers against Mexico, Canada, and China, sparing Europe from immediate threats. This has led to a rise in the euro, a decline in oil prices, and a firming of bets on ECB rate cuts.
Investors had feared that a strong dollar, rising energy costs, and retaliatory trade measures from the EU could push up inflation, hampering the ECB's efforts to achieve its 2% target. However, the absence of aggressive trade policies from the US has allayed these fears.
Financial markets now fully expect four ECB rate cuts this year, a shift from recent uncertainty over a fourth move. The dollar's retreat from its recent highs has contributed to this shift, reducing the risk of import inflation in Europe.
Despite the positive outlook, investors remain cautious about the potential for swift policy changes under Trump. In 2019, he criticized the ECB's monetary stimulus, arguing that it unfairly benefited eurozone companies.
However, some economists argue that the ECB is likely to continue cutting rates, even if Trump takes a harder stance against the EU, which has maintained a large trade surplus with the US. They believe that the negative impact of potential tariffs on economic growth could outweigh any inflationary effects.
The ECB rate cut is expected to be announced on January 25th, with further cuts possible in March, June, and potentially beyond.