ECB warns: possible tightening of monetary policy in response to Trump’s tariff effects

Brussels – The tariffs wanted by US President Donald Trump (and
accepted nearly passively by the EU) will have an impact on the global economy, the real economy, and also on the choices that the European Central Bank will be called upon to make from here on out and not only in response to the effects of the new transatlantic relations. The ECB itself, through a study on the possible contagion effects of the agreement signed at the end of July, and not only that, warns of all the negative scenarios for the coming months. 

First of all, the Frankfurt-based experts warn that “the introduction of wide-ranging customs duties by the United States in 2025 is expected to reshape global trade flows and have a negative impact on economic activity, with retaliation by trading partners likely to exacerbate these effects.” In addition to their immediate influence on trade volumes and price levels, tariffs operate through a variety of interconnected mechanisms that amplify their macroeconomic consequences, and these mechanisms include the role of the US dollar.

With the US currency’s preponderance in international trade, it is emphasised, “the transmission of tariffs to import prices is significant and the exchange rate’s ability to absorb shocks is impaired.” What does this mean in practice? For the United States, where imports are priced mainly in its own currency, “the real appreciation of the dollar offers no offsetting relief from higher import costs, which are directly reflected in producer and consumer prices.” For other economies, including those of the eurozone and its members, currency depreciation against the dollar may mitigate the decline in export competitiveness, but simultaneously “allies imported inflation, complicating the monetary policy response“. 

https://www.eunews.it/en/2025/09/01/ecb-experts-high-uncertainty-is-holding-back-households-and-businesses-weakening-policy-impact/ 

In this context, the monetary policy response emerges as a key determinant of the final macroeconomic impact. Currently, the reference simulations available within the ECB, which assume that central banks aim to contain inflation, indicate that “inflationary pressure from tariffs requires a tightening of policies in both the US and the euro area.” This means higher interest rates, with all the consequences, first and foremost, the difficulty in paying mortgages and loans due to higher instalments. This monetary policy response, therefore, risks weighing on domestic consumption and growth. 

The needle in the balance risks becoming China. The controlled fluctuation of the renminbi by the People’s Republic of China and the substantial rise of dollar-denominated export prices influence economic developments. First and foremost, contained inflation allows for a more accommodative stance of monetary policies to cushion the decline in Gross Domestic Product (GDP). Analyses conducted by the ECB note that alternative monetary policy frameworks, such as higher producer prices or longer-term inflation, could mitigate the negative effects on GDP by reducing the immediate impetus for interest rate increases, although this comes at the expense of higher overall inflation in the short term.