Pierre Wunsch, a member of the European Central Bank’s (ECB) Governing Council, stated that U.S. President Donald Trump’s tariff policies are complicating the outlook for interest rates in Europe.
Speaking to Finance Newso’s Karen Tso during the IIF Europe Summit in Brussels, Wunsch remarked on how he felt the ECB was previously on a solid trajectory. “We were going in the right direction. And I was actually quite relaxed,” he said.
He continued, “If we forget tariffs…we were going in the right direction. Then the question was more of fine-tuning the pace of cuts and where we land.” However, he cautioned that with tariffs now in play, the situation has become less straightforward. “Inflation might be the boring part of 2025, and 2025 is not a boring year. But if you add tariffs to the equation, it’s becoming more complicated,” he added.
Wunsch, who also serves as the Governor of the National Bank of Belgium, expressed concerns that tariffs would have negative implications for growth while likely increasing inflation. However, he noted that the exact effects are uncertain and will largely depend on whether retaliatory actions occur and how exchange rates respond to the rates imposed.
These comments followed Trump’s announcement of a 25% tariff on all vehicles not manufactured in the United States, set to take effect on April 2. Trump has also threatened to impose “far larger” tariffs on the European Union and Canada should they collaborate to oppose U.S. duties.
This latest announcement is part of Trump’s ongoing trade policy saga, which has seen several tariffs introduced, adjusted, and in some cases rescinded, as negotiations and countermeasures unfold.
April 2 is anticipated to be a pivotal date for the implementation of numerous duties, although there have been indications from the Trump administration that modifications might be forthcoming, potentially softening the impact of these tariffs.
Upcoming Interest Rate Decisions
The ECB is expected to announce its next interest rate decision on April 17, shortly after the tariffs are initiated. Current market predictions, based on LSEG data, suggest there is approximately a 79% likelihood of a 25-basis-point rate cut from the ECB in the following month.
By that time, Wunsch indicated that the central bank should have a clearer understanding of the tariff impacts, which may influence their decision-making. However, he advised against overemphasizing the April meeting, as the effects of trade policy are likely to manifest over the medium term.
Wunsch left the possibility open for various monetary policy actions, including further cuts, increases, or a pause in rate adjustments. “I think the likelihood is still limited that we would have to hike, but there might be a case for a pause,” he remarked.
He continued, “If tariffs have an inflationary impact and a negative impact on growth, it’s going to be a difficult equation, and we might have to consider a pause. I’m not pleading for one, but I think it should be part of the discussion.”
Balancing Fiscal and Tariff Policies
Wunsch also pointed out that recent changes in fiscal policies in Europe could mitigate the effects of the tariffs.
This month, Germany made significant adjustments to its constitutional framework, allowing for heightened defense spending and the establishment of a 500 billion euro ($539 billion) special infrastructure fund. Furthermore, the European Commission is moving forward with a substantial defense expenditure package, aiming to mobilize up to 800 billion euros for security enhancements.
While the outcomes of these EU-wide plans remain uncertain, Wunsch noted that developments in Germany are particularly noteworthy. “What’s going to take place in Germany is…significant,” he said, suggesting that these measures could potentially offset some of the impacts caused by U.S. tariffs.
Should the effects of tariffs and fiscal expansions counterbalance each other, Wunsch indicated that the primary remaining concern might be the inflationary pressure spurred by the tariffs, underscoring the importance of examining not just immediate outcomes in April, but also the broader trends over the next one to two years.
“The risk might be on the upside on the inflation front,” he concluded.
