ECB/Makhlouf: Uncertainty for Rate Setters is Currently Higher than During the Quarantine Period

Forex - Gabriel Makhlouf, Governor of the Central Bank of Ireland and a member of the ECB's Governing Council, stated that policymakers currently face more uncertainty than they did during the initial stages of the coronavirus pandemic. In an interview with the Financial Times, Makhlouf noted that the outlook for the coming year is likely "shrouded in more uncertainty than when we were locked down" due to the challenges of interpreting the agenda and actions of the newly elected President Donald Trump. President Trump has pledged to impose tariffs of up to 20% on all U.S. imports and to increase tariffs on China to 60% when he returns to the White House on January 20.

Most economists, including those at the European Central Bank, believe that a global trade war triggered by the U.S. would negatively impact growth in the export-dependent Eurozone. Some analysts argue that the ECB should preemptively lower interest rates to protect against Trump's second term in the White House due to the Eurozone's growth being weaker than expected and inflation falling faster than anticipated towards the central bank's 2% target.

However, despite the risks, Makhlouf, who holds one of the 26 votes on the ECB's governing council, stated that the uncertainty is so pervasive that "[interest rate] insurance cuts may not really help [but] could actually create a different problem." He cautioned that it remains uncertain whether Trump is serious about tariffs or if his threats are merely a bargaining strategy to achieve other policy goals.

Acknowledging that additional trade barriers would "not be good for the world," Makhlouf contended that measuring their impact on growth and inflation is currently impossible, stating, "There are so many warnings and so many variables that any scenario analysis runs the risk of giving people a false sense that we understand how all this will play out."