How can central banks respond to Trump's new rates?

Copyright © HT Digital Streams Limit all rights reserved. Paul Hannon, The Wall Street Journal 3 min Read 03 Apr 2025, 02:27 PM Ist the European Central Bank Building, in Frankfurt, Germany. Photo: Wolfgang Rattay/Reuters Summary Increased rates increase prices in the country it imposes, reducing economic activity in the country they target. Increased rates increase prices in the country that impose it, and reduce the economic activity in the country they target. This is about as much as central banks around the world can be sure as they respond to President Trump’s new duties on imports to the US, which threatens to re -wire the global economy in unpredictable ways. “There are moments in history when things that were once in stone became fluent,” said Christine Lagarde, president of the European Central Bank. “The geopolitical landscape we face today is turned upside down.” The impact of Trump’s tariffs on inflation in countries outside the US will depend on whether there is retaliation, the extent to which goods that would be sold to US buyers end up elsewhere and currency movements. The impact can also differ over time, with rates that initially raise prices, but later have a disinfectant effect if the economy is slow. For these reasons, the right call on rates is not cut and dried for central banks. But for those who made a sentence, policymakers leaned largely but unanimously to ease policies to counteract the hit against growth. Trump announced another round of tariff hikes on Wednesday, which added to earlier tax increase. All US imports will be subject to a 10%rate, with effect from 5 April. However, some countries will be hit with higher tariff rates starting on April 9. For example, a 34% duty applies to China, 20% for Europe and 24% for Japan. Higher US rates will weaken export -related activity in the targeted countries, and it is likely to cool off inflation over time. The more dependent on a country to US buyers, the greater the effect, with some facing the threat of a slide in the recession. But if a government chooses to retaliate by increasing its duties on US imports, prices will rise, just as in the US, so that ECB estimates that inflation in the eurozone can be as much as half a percentage point higher than the US tariff can rise rapidly retaliation. The distraction of trade would have the opposite effect, and lower prices. For example, if businesses in China find that demand for their products has weakened because rates have made it more expensive for US buyers, they will probably try to find customers elsewhere and lower their prices to do so. Thus, although the price of a specific product in the US may rise due to higher rates, it may fall in other countries. Foreign exchange tariffs are the other major factor in determining how rates will affect inflation rates, activity and jobs around the world. Economists would typically expect the currency of the country that impose rates against the currencies of the targeted countries. This is for two reasons. First, the weaker demand for the rates products must weaken the demand for the currency in which it is sold. Secondly, the boost for inflation in the US of higher rates is likely to mean that the Fed keeps interest rates higher than different, increasing the returns to dollar assets holders. However, currencies have not moved as expected in recent months, with the euro earning against the dollar. “We don’t know how currencies will act, and that’s the key,” says Megan Greene, a tariff creation at the bank or England. Central banks around the world have long to reflect on the impact of higher rates, and many have published analyzes of the potential impact that emphasizes how much it depends on the specific way the key factors interact, as well as the exact details of the new rates. If it seems unconvincing, what we do know is that policymakers generally did not withhold the rate cut, as it became clear that Trump meant what he said on the campaign. The central banks of Canada and Mexico recently decided to continue the rate cut in the shade of new rates. Thus, it seems that central bankers see rates and the economic disruption of the time being that it will reduce inflation in the coming years, even if there is an initial rise in prices. If the substance lies on the re -alignment of the global economy that appears to be, the consumer prices are likely to be higher worldwide, if only because the driving force behind globalization was the search for the lowest coastal locations in which it was possible. Write to Paul Hannon on [email protected], capture all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Tariff Hike Mint Specials