European Central Bank (ECB) President Christine Lagarde has warned of the effect of trade restrictions on the global economy. In her statement, Lagarde mentioned that increased trade restrictions could bring back inflation, hitting the global economy hard.
During her speech at the International Monetary Fund (IMF) annual meeting, Lagarde clarified that international cooperation is not just word of mouth. She said it is essential while stressing the need for global growth to be on track.
Lagarde noted that real concerns surrounding security and supply chain resilience will not put us on the path of protectionism.
She clarified that more trade barriers could mean an increase in costs for businesses that are dependent on imported materials while trimming the pool of suppliers. Lagarde noted that it could lead to difficulty for central banks to manage inflation.
Global trading barriers have been on the rise over the past year. One major factor is the growing mistrust among nations. Major economies no longer rely on each other due to tricky diplomatic ties with other countries.
And since the beginning of the war between Russia and Ukraine, these issues have only piled up. ECB analysts have cited a possibility of a 6% global GDP loss if countries continue to put up barriers around strategic goods.
If the issue continues unchecked, analysts estimate that could lead to a 9% global loss. Lagarde’s warning is also coming at the perfect time. With the United States elections on the horizon, Democrat candidate Donald Trump has been pushing for tariffs against several nations, including China. If he emerges as the next president, the weak domestic demand in the eurozone could take more beating.
ECB makes tough decisions on interest rates
Under Lagarde’s leadership, the bank has been in a constant battle with inflation. This month, the bank made a bold move by making consecutive rate cuts, a first in 13 years. The cuts were reported to push against reduced inflation risks and a bad economic outlook.
In September, the ECB revised inflation to 1.7%, a slight drop from its estimated 2% target. The figure is also a drop from August’s 2.2%. Head of the central bank in Portugal Mario Centeno claimed that the inflation figure was lower than they anticipated in September.
While Centeno believes there is an opening for optimism, he thinks there could also be bigger cuts in the future. He noted that a 50-basis-point cut could happen in December, but they need to check if the incoming data will back it up.
Dutch ECB governing council member Klaas Knot also discussed his views about the development. He said there could be a half-point interest rate cut if the data points towards a downturn.
Knot added that the ECB could hit its 2% target in 2025, but the December data needs to back it up. He clarified that the situation could mean that the ECB would press pause for a bit and move towards a neutral rate that is not slowing the economy down.
Different views on the way forward
The members of the ECB’s governing council are not on the same page. Some of the members are against a drastic cut as it might turn out to be a risky move in these times. However, Knot has said the new approach will be determined after several meetings and when they’ve looked at the data involved.
He talked about market expectations, noting that they were overhyped after weak PMI numbers have signaled the need for more cuts. He also said the eurozone’s outlook is not as bad as people think and it is not great either. However, he cautioned that the economy needs service prices and wage growth to hit the target.
In terms of policy, he said policy reduction may happen if the new data points towards a sustained acceleration. Lithuanian ECB governing Council member Gediminas Simkus discussed the need for caution before big cuts. He said they are not grounded unless something bad appears in the data.
Head of Germany’s Bundesbank Joachim Nagel echoed the same sentiments about predicting future cuts. He mentioned that the new data needs to be looked at before a decision is made. The uncertainty is reflected across the ECB as officials cooled off market speculations.