European central banks have diverged from the US Federal Reserve in taking steps to cut interest rates or signal easing, while the Fed has remained cautious and has refused to provide clear guidance on its next steps. Despite the decline in global inflation, the Fed is expected to face a surge in inflation due to the trade war, which will have a greater impact on US consumers.
Other countries may suffer the opposite effect, with slower inflation due to weaker trade, a strengthening of their currencies against the US dollar and lower energy costs. The Bank of England has cut rates by 25 basis points and warned of the potential for further easing, while the central banks of Sweden and Norway have also signaled similar moves. The European Central Bank is expected to announce its eighth rate cut in 13 months at its June meeting.
Meanwhile, the Fed has warned that uncertainty over tariffs could push up inflation and unemployment simultaneously, two opposing impacts that require different policy responses. Fed Chairman Jerome Powell said there was no immediate need to act, but stressed that the situation resembled a pandemic-like supply shock, rather than the typical demand weakness seen in a recession.
However, central banks face a major challenge because the impact of any rate decision will only be felt for 12 to 18 months, while political decisions can change in the blink of an eye. The key task now is therefore to maintain financial market confidence and prevent the impact of tariffs from triggering prolonged inflation. As experts have warned, tariffs could erode companies’ profit margins, prompt a credit crunch and ultimately lead to mass layoffs.
