Investors and policymakers around the world are awaiting the details of U.S. President-elect Donald Trump’s new trade policy after he made protectionism a key element of his pitch to voters during the campaign.
ECB Vice-President Luis de Guindos and Bundesbank President Joachim Nagel put the emphasis on the hit that new trade restrictions would have on output while they appeared more sanguine on the outlook for inflation, which has been easing after a two-year surge.
“The balance of macro-risks has shifted from concerns about high inflation to fears over economic growth,” de Guindos told an event in Frankfurt.
“The growth outlook is clouded by uncertainty about economic policies and the geopolitical landscape, both in the euro area and globally. Trade tensions could rise further, increasing the risk of tail events materialising.”
Some analysts fear Trump’s second term could bring a much worse rerun of the Republican former president’s 2018-2019 trade war with China, with ramifications for Europe and possible retaliation.
Nagel, speaking in Tokyo, said the tariffs promised by Trump would upend international trade but he was “not overly” worried about their impact on inflation.
“Global integration would have to decrease substantially to cause a noticeable rise in inflationary pressures,” he said. “And, so far, we have not seen this.”
He said that if geoeconomic fragmentation did lead to greater inflationary pressures, the ECB and other central banks would could keep it at bay via higher interest rates.
But he also argued that the ECB could not “completely neglect output” and would not overreact to moves in inflation.
“We operationalise our mandate by aiming for inflation of 2% over the medium term,” he said. “This allows us to respond flexibly and avoid overreactions that could lead to destabilisation.”
Similarly, de Guindos said he was confident that inflation would stabilise at 2% next year and monetary policy would follow suit.
The ECB has cut interest rates three times since June as inflation in the euro area neared its 2% target, while also downgrading its growth projections twice as a recovery in the 20 countries that share the euro proved elusive.
To read the full article, Click Here