In a keynote speech, European Central Bank President Christine Lagarde assessed how the shift to “geoeconomics” and recent US tariff increases are feeding through to the euro area, arguing that the shock has so far been felt mainly through weaker growth rather than higher inflation. She linked this to a policy backdrop in which the earlier inflation surge has largely faded, allowing the ECB to cut policy rates by 100 basis points since December while keeping medium-term inflation on track, with policy rates now at 2%. The speech highlighted that several channels expected to amplify inflation have been muted: EU retaliation has been limited, with counter-tariffs on around EUR 26 billion of US goods suspended after a July deal, and euro area supply-chain pressures and bottleneck indicators remaining close to historical averages. The exchange rate has also moved in the opposite direction to many model-based expectations, with the euro up 13% against the US dollar since the start of the year, alongside a 6.5% rise in the nominal effective exchange rate and a 5% rise in the real effective exchange rate, helping contain imported inflation but adding to the drag on growth; 52% of imports are invoiced in euros, though many commodities remain dollar priced. On the activity side, the expected cumulative impact of tariffs and uncertainty on growth was put at around 0.7 percentage points over 2025-2027, partly offset by an anticipated 0.25 percentage point contribution from government investment over the same period and by new and prospective EU trade agreements. On risks, Lagarde framed downside growth outcomes as still the most salient in escalation scenarios, with staff analysis cited showing severe trade-tension escalation could lower growth cumulatively by about 1 percentage point over the projection horizon, while inflation risks were presented as two-sided but generally contained, with scenario impacts on 2027 inflation of around 0.1-0.2 percentage points under reasonable assumptions. She stressed that the full effects of tariffs may yet emerge as firms run down inventories and absorb shocks in margins, and reiterated that the ECB cannot pre-commit to a future rate path and will remain agile and data-dependent.
European Central Bank 2025-09-30
European Central Bank’s Lagarde says US tariffs are weighing on euro area growth with limited inflation impact as rates fall 100bp to 2%
European Central Bank President Christine Lagarde discussed the shift to "geoeconomics" and US tariffs' impact on the euro area, noting weaker growth rather than higher inflation. She highlighted the ECB's 100 basis point rate cut since December, with medium-term inflation on track. Lagarde emphasized persistent downside growth risks, with severe trade-tension escalation potentially reducing growth by 1 percentage point over the projection horizon.