Trump Win Prompts ECB Forecasters to Ask How Far Rates Can Fall

(Bloomberg) -- Donald Trump’s election win is leading some forecasters to question if the European Central Bank will need to return borrowing costs toward highly stimulative levels as his threat of trade tariffs materializes.

Most Read from Bloomberg

Economists at ABN Amro changed their call for euro-zone monetary policy on Wednesday to predict that the key deposit facility rate – currently at 3.25% – will fall to 1% in early 2026, from a low of 1.5% previously. Trump’s measures on trade will hit growth and inflation in the 20-nation bloc’s economy significantly, they wrote in a report.

Such levies could even invoke a return of the so-called zero interest rate policy, known as ZIRP, that the ECB exited in 2022, according to Davide Oneglia, an economist at TS Lombard.

“If the ECB were forced to cut below the 2% threshold because significant downside risks materialized, it is unclear why it would then only just cut marginally below it,” he argued in a report on Tuesday. “In fact, 1% would likely be the next stop, with rising probability of a return to ZIRP.”

Trump’s return to the White House augurs a protectionist era in US policy, not least with his pledge to impose 60% tariffs on China and as much as 20% on everyone else. Earlier on Wednesday, Bundesbank President Joachim Nagel warned that such measures would risk derailing the German economy.

ECB policymakers will take final rate decision of the year next month, with another quarter-point cut seen by investors as the most probable outcome.

While further easing appears likely, they remain tight-lipped on the pace and extent. Some already worry about an undershooting in inflation and return to the pre-Covid days of below-target inflation, which prompted the ECB to take rates to unprecedented lows under zero in 2014.

Other economists have also begun cutting forecasts for borrowing costs. Deutsche Bank lowered its terminal rate prediction to 1.5% from 2.25%, while considering 1%-1.75% to be the main landing zone for the deposit rate.

“The rationale in part relates to the prospect of US tariffs under a new Trump Administration and in part a weaker underlying macro performance and the emerging threat of below-target inflation,” they wrote in a report last week.

Bloomberg Economics isn’t so convinced that deeper rate cuts are in store.

“Trump’s policies will create a trade off between growth and inflation,” economists Jamie Rush and Dan Hanson wrote on Nov. 8. “Given recent experience with surging price pressure, we think policymakers may be more inclined to focus on the latter.”

Bank of France Governor Francois Villeroy de Galhau, speaking on France Inter on Wednesday, highlighted an emerging consensus that the biggest hit from Trump’s tariff policy would be to expansion.

“Nearly all economists agree that it risks increasing inflation in the US and bring growth down a bit everywhere in the world,” he said. “It remains to be seen if it declines more in the US, China or Europe.”

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.