President Trump’s return: What it means for eurozone interest rates

Donald Trump will be sworn in as the 47th president of the United States later today, marking the beginning of a second term that is expected to reshape economic policy at home and abroad.

His agenda, centred on sweeping trade tariffs, corporate tax cuts, immigration restrictions and increased pressure on NATO allies, could have far-reaching consequences for growth, inflation and interest rates, not just in the US but globally.

In the eurozone, Trump’s policies are likely to influence the European Central Bank’s monetary decisions in the months ahead, potentially accelerating rate cuts and impacting exchange rates.

Will the ECB continue cutting rates?

Economists expect a widening gap between US and eurozone monetary policy. While the Federal Reserve is likely to keep interest rates steady, or even tighten policy to combat inflationary pressures, the ECB is expected to continue cutting rates.

For Hélène Baudchon, a senior economist at BNP Paribas, the US will face the inflationary effects of “Trumponomics,” a mix of trade protectionism and expansionary fiscal policies that could keep price pressures elevated and force the Fed to maintain the status quo on interest rates. 

For the eurozone, she sees a different trajectory: “The expected strengthening of growth will remain limited and constrained, but the return of inflation to the 2% target will be secured, allowing the ECB to continue its rate cuts.”

At Bank of America, economist Ruben Segura-Cayuela warns that a 10% tariff on European Union imports could weigh on economic activity, shaving “0.4-0.5 percentage points of euro area GDP.”

He adds that, if uncertainty and tariff shocks materialise, the ECB may be forced to cut rates “larger than 25 basis points” and lower its terminal rate below 1.5%.

How will tariffs impact inflation and the euro?

The ECB’s rate path will depend on how Trump’s policies unfold and their spillover effects on the European economy. 

CaixaBank notes that the ECB follows a “data-dependent” strategy but suggests that its decisions will likely be shaped by expectations surrounding US economic policy.

Trump’s proposed tariffs – ranging from 10-20% on all imports and up to 60% on Chinese goods – are widely seen as inflationary.

“The implementation of widespread tariffs will put inflationary pressure on the US”, says Rogier Quaedvlieg, an economist at ABN Amro, noting that this contradicts Trump’s campaign pledge to bring down inflation.

Dominic Wilson, an economist at Goldman Sachs, sees additional risks for the eurozone, saying it is “especially vulnerable” to the uncertainty surrounding new trade restrictions.

“It is hard to envisage a coordinated fiscal response to an already weak cyclical position given the political uncertainty in Germany and France”, he says. As a result, further ECB easing remains the most likely policy response.

A stronger dollar is another likely outcome of Trump’s policies, which could weigh on the euro. Goldman Sachs foreign exchange analyst Kamakshya Trivedi says: “We expect the dollar to rally by about 5% over the coming year on the realisation of new tariffs and continued US outperformance. We now forecast EUR/USD below parity.”

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For the eurozone, the extent of the tariff impact will depend on how the ECB responds. 

Brussels-based think tank Bruegel warns that tariffs will act as a “negative supply shock” for the EU economy. 

However, US fiscal stimulus, higher inflation, and a stronger dollar could boost demand for European exports, partially offsetting the damage. “The net macroeconomic effect on the EU will depend largely on the reaction of the European Central Bank”, Bruegel analysts say.

Could US economic growth slow?

Despite Trump’s push for tax cuts and protectionist trade policies, some economists argue that his agenda could create headwinds for US growth.

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Quaedvlieg at ABN Amro warns that tariffs could backfire, hitting the US economy at an inopportune moment. 

“Tariffs will likely hit at a particularly inconvenient time”, he says, pointing out that inflation remains above target and signs of disinflation have stalled. 

According to the expert, this could force the Fed to keep interest rates higher for longer, making Trump’s goal of stronger economic growth harder to achieve. “These tariffs will distort global trade and also threaten the recoveries of the eurozone and China.”

He argues that higher tariffs is likely to distort global trade flows, creating challenges not only for the US but also for the eurozone and China.

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BNP Paribas’ Baudchon indicates that 2025 could reduce the divergence between US and eurozone growth rates, as both economies face trade-related challenges.

However, she believes that inflation dynamics will instead remain on different paths, leading to a “decoupling of monetary policies”.