ECB and US Fed not yet at finish line
Capital market participants are expecting a series of interest rate cuts this year in both the Eurozone and the US, with two interest rate cuts of 25 basis points each by the US Federal Reserve and four by the European Central Bank (ECB). In the US, the still strong labor market weakened somewhat over the course of last year, while the Eurozone economy could certainly do better with a further easing of monetary policy. What both central banks have in common is that an annual inflation rate of two percent is the target, or one of them. However, the latest inflation data on both sides of the Atlantic showed sideways or even upward trends. Rising energy prices and a broad-based trade conflict could put additional upward pressure on inflation. However, we assume that both central banks will cut interest rates further, although there is uncertainty about the extent.
Donald Trump's new presidency undoubtedly poses a number of risks. The announcement to set US tariffs at 10% worldwide, 25% for Canada and Mexico from February 1, 2025, and, in particular, to impose 10-60% tariffs on Chinese imports would lead to trade conflicts and thus to uncertainty for both companies and consumers. Further potential risks lie not only in the geopolitical problem areas, but also in the fact that the US could lose trustworthiness in the course of a possible reorganization of global trade. For example, in the run-up to his presidency, Trump openly torpedoed the USMCA agreement, the successor to NAFTA, which he himself had negotiated during his first term of office, and suddenly linked trade policy with immigration and drug policy.
As always, in this interest rate outlook, we present our expectations for both central banks, the ECB and the US Fed, as well as for the respective government bond markets in compact form. In addition, we focus on the economic policy issue of trade conflicts, which very quickly returned to the spotlight in the wake of Donald Trump's inauguration on January 20, 2025.
Author
Erste Bank Research Team
Erste Bank
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