Europe’s Rates Head Lower in Readiness for Another Trump Era
(Bloomberg) -- Europe’s central banks are taking a determined dovish turn to aid economies bracing for more disruption from Donald Trump’s second stint in the White House.
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Decisions by policymakers in Frankfurt and Bern on Thursday to cut interest rates left little doubt over the prospect of possible future easing to cushion the effect of unknowns ranging from trade tensions to geopolitically stoked currency volatility.
Most drastic was the Swiss National Bank’s surprise half-point reduction to 0.5%, further undoing constriction to reach a level last seen in September 2022, when officials ended almost eight years of subzero monetary policy.
The European Central Bank’s own quarter-point move — bringing its rate to a 1 1/2-year low — was accompanied by President Christine Lagarde’s observation that “the direction of travel currently is very clear.”
There’ll probably be moves of the same size in January and March, according to people familiar with the matter.
Following suit, Danish policymakers in Copenhagen also reduced borrowing costs.
With Thursday’s round of easing marking the final scheduled chance for officials to get their ducks in a row before Trump takes office in January, worries about growth or too-low inflation are taking firm precedent over concerns about lingering price pressures.
“Tariffs will ultimately prove to be a disinflationary shock” for the euro zone, economists Nick Kounis, Jan-Paul van de Kerke and Bill Diviney at ABN Amro said in a report. “This should see inflation undershooting the target over the medium term, which would require an accommodative monetary-policy stance.”
Angst about the regime change in the White House is apparent elsewhere too. Canada’s central bank, cognizant of the danger of higher trade tariffs from its southern neighbor, cut by a half-point on Wednesday.
Brazilian policymakers, fresh from currency gyrations amid fiscal turmoil and Trump’s threat to BRICS members not to challenge the dollar’s dominance, later raised their own rate by 100 basis points.
It was currency worries in particular that motivated the SNB’s move. A new era of speculation in the franc, long seen by investors as a haven at times of geopolitical stress, is keeping officials on alert to stave off such speculation.
Vice President Antoine Martin told reporters that “developments abroad represent the main risk” to Switzerland’s economy. SNB chief Martin Schlegel warned traders that policymakers will lower rates if needed, could intervene in currency markets and will take borrowing costs negative again if they have to.