ECB economists: Tariff shocks drag down inflation, rate cuts expected to offset negative impact

Latest research from economists at the European Central Bank shows that US tariff policies are dragging down economic growth and inflation levels in the euro area. However, the study also points out that the industries most severely affected by the shocks are also the most sensitive to interest rate changes, which means the ECB has the potential to partially offset the downward price pressure brought by tariffs by loosening monetary policy through rate cuts.

The study was published Tuesday on the ECB’s official blog. Its analysis finds that the demand-reducing effect caused by tariffs outweighs their inflationary pressure on supply chains, ultimately dragging down overall price levels. Based on estimates, if the euro area’s exports to the US fall by 1% due to tariff shocks, the consumer price index will drop by about 0.1% cumulatively over the next 18 months.

This conclusion has reference value for the ECB’s monetary policy decisions. Currently, the eurozone inflation rate has dropped to 1.7%, below the 2% policy target, with some policymakers concerned that inflation may remain subdued. The research further points out that the industries most affected by tariffs—machinery, automobiles, and chemicals—are also the ones most responsive to interest rate adjustments. This provides potential space and rationale for the ECB to use monetary policy tools to buffer external trade shocks.

Tariff Shocks Suppress Price Levels

According to Reuters, ECB economists’ research indicates that US-imposed tariff policies on multiple countries are having various impacts on the euro area economy. Although ECB officials previously had differing assessments of tariff impacts, this study clearly shows that the demand-reducing effect has become dominant.

The US currently maintains a base tariff of 15% on EU goods. Trade data over the past year has swung significantly, with businesses front-loading purchases to avoid tariffs, followed by a period of inventory digestion. The latest trend shows that, in the most recent three months for which data is available, the euro area’s exports to the US have declined about 6.5% year-on-year. The study was released via the ECB blog; while its conclusions do not represent the official stance of the central bank, they offer important quantitative reference for assessing the net impact of tariffs on inflation.

Interest Rate-Sensitive Sectors Are Key

The research found that the industries most significantly impacted by US tariff shocks—mainly machinery, automobiles, and chemicals—are likewise highly sensitive to interest rate changes. Economists noted that while output in these sectors may shrink substantially due to tariffs, they are also able to respond positively to falling financing costs. Statistics show that industries with these characteristics account for about 60% of the scope covered by the study; their industrial output makes up 50% of the euro area total, and about half of the total value of goods exported to the US.

This means the ECB can use rate cuts to partially buffer the negative effects of tariffs on these key industries, supporting economic activity while also helping to avoid further declines in inflation.

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