According to Pierre Wunsch, a member of the ECB’s Governing Council, U.S. President Donald Trump’s tariff policies are creating a “more complicated” landscape for European Central Bank interest rates.
“We were headed in the right direction, and I felt quite at ease,” he remarked during an interview with CNBC’s Karen Tso on Thursday, held at the IIF Europe Summit in Brussels.
“Ignoring the tariffs, we were on a positive trajectory. The measurement then was more about fine-tuning the rate cuts and determining our endpoint,” Wunsch elaborated. “I believed that inflation could be a dull subject in [20]25, while [20]25 itself wouldn’t be dull at all. However, introducing tariffs complicates the situation,” he added.
Wunsch, who also serves as the Governor of the National Bank of Belgium, cautioned that tariffs would negatively impact growth and could likely increase inflation, though the precise consequences remain uncertain and will depend on any potential retaliatory measures and how exchange rates respond to tariffs.
His statements followed Trump’s announcement of a 25% tariff on all vehicles “not manufactured in the United States,” effective from April 2. Trump further warned on Truth Social on Thursday that he might impose “substantially larger” tariffs on the European Union and Canada if they unite against U.S. tariffs.
These developments add to the ongoing chaotic trend in Trump’s trade policy, which has involved numerous tariffs that have sometimes been postponed, altered, or rescinded, amid negotiations and counteractions.
April 2 looms as a significant date for various tariffs to take effect, although recent remarks from Trump and his administration suggest that modifications may occur, potentially resulting in less severe tariffs than initially proposed.
Upcoming interest rate decisions
The ECB’s next decision on interest rates is scheduled for April 17, shortly after the tariffs are due to be implemented. According to LSEG data, markets are currently estimating a roughly 79% likelihood of a 25-basis-point cut in interest rates by the ECB next month.
By that time, Wunsch stated that the central bank might have a clearer understanding of the tariffs’ effects, which could inform the ECB’s decisions. However, he cautioned against focusing too heavily on April since trade policies are likely to have a medium-term impact.
On Thursday, the central banker indicated that the ECB remains open to various options regarding interest rates — whether that means further cuts, a rate increase, or maintaining the current rates.
“The likelihood of a rate hike remains limited, but we could consider a pause,” he mentioned.
“If tariffs lead to heightened inflation and adversely affect growth, it presents a challenging equation, and we may need to deliberate on a pause. While I’m not advocating for one, it’s a conversation worth having,” he stated.
Fiscal versus tariff policy
Policymaker Wunsch also highlighted that recent changes in fiscal policy across Europe might mitigate the effects of tariffs.
Earlier this month, Germany modified its constitution in what has been characterized as a fiscal turnaround, changing longstanding debt policies to allow for increased defense spending and establishing a 500 billion euro ($539 billion) infrastructure fund.
Simultaneously, the European Commission is advancing toward a substantial defense expenditure package, promising to allocate as much as 800 billion euros for security spending.
While the specifics of the EU-wide initiatives are still unclear, Wunsch believes that what occurs in Germany will be notably significant.
He suggested that the country’s strategies “could, to a degree, and perhaps significantly, offset the impact of U.S. tariffs over the medium term.”
If the effects of tariffs and fiscal growth counterbalance each other, the residual impact from the tariffs may primarily involve elevated inflation, prompting Wunsch to advise looking beyond April for a more extended view over the next one to two years.
“The risk might lean towards rising inflation,” he stated.
