ECB’s Schnabel says price increases from tariffs could limit interest rate cuts

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The European Central Bank chief executive warns that the global trade war will threaten to boost inflation in the eurozone and limit the room for further interest rate cuts in the currency area.

ECB Hawk Isabel Schnabel, a member of the central bank’s six-man executive committee, said in a speech in the US on Friday night that it marked a surge in defence spending in Europe, particularly Germany.

“There is a risk that a permanent and meaningful increase in tariffs will strengthen the upward pressure on underlying inflation that arises from increased fiscal spending over the medium term,” she said in a speech at Stanford University in California.

The EU is facing a 20% collection of all exports to the US, with Chairman Ursula von der Reyen saying this week that the Bullock is “prepared for all possibilities.”

Schnabel acknowledged that trade wars could also contain inflation by hitting demand. This is to a level of “very important” shock depending on the final outcome of the tariff negotiations.

Her remarks challenge an increasingly difficult consensus among economists and investors who are predicting the ECB will cut another quarter of its meeting in June. Overall, traders are betting on two or three such cuts by the end of the year.

The ECB has reduced its borrowing costs on a seven-point scale since June, during which time it reduced its benchmark rate to 4% to 2.25%.

Even before President Donald Trump announced “mutual” tariffs for many major trading partners at his “liberation day” event on April 2, Schnabel was sought for discussion about further interest rate cuts in the Euro region.

In a speech on Friday, Schnabel harbored the issue with the new view that Trump’s trade war could attenuate rather than rising fuel prices, rather than rising eurozone consumer prices.

In April, eurozone inflation remained stable at 2.2%, surpassing expectations and hovering past its 2% target for the sixth consecutive month.

However, many analysts argued that the April data was skewed by a one-off impact and skewed anticipated inflation over the coming months. That debate is supported by an unexpected euro strengthening in the wake of Trump’s drastic tariff announcement, which will reduce imports into the currency area. Oil prices are also falling sharply, and US exports are expected to be a hit.

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However, Schnabel argued on Friday that in the medium term, the increased fiscal spending and the ability of tariffs to collide with the supply chain means that inflation risks are “highly likely to be tilted upside down.”

ECB President Christine Lagarde told journalists in April that the “net impact” of the tariff war on inflation “will become more clear over time,” adding that it had created a “negative demand shock” that would have “some degree of impact on growth” in the eurozone.