ECB economists: Tariff shocks weigh on inflation, and interest rate cuts are expected to offset negative impacts

The latest research by European Central Bank economists shows that U.S. tariff policies are dragging down economic growth and inflation levels in the Eurozone. However, the study also points out that the industries most severely impacted by the shock are also the most sensitive to interest rate changes, which means that the European Central Bank's easing of monetary policy through interest rate cuts is expected to partially offset the downward price pressure caused by tariffs. This research was published on Tuesday on the European Central Bank's official blog, and its analysis suggests that the demand reduction effect caused by tariffs outweighs the inflationary pressure on supply chains, ultimately creating a downward drag on overall price levels. According to the study's estimates, if Eurozone exports to the U.S. decline by 1% due to tariff shocks, the consumer price index is expected to decrease by about 0.1% approximately 18 months later. This conclusion is relevant for the European Central Bank's monetary policy decision-making. Currently, the Eurozone inflation rate has fallen to 1.7%, below the 2% policy target, and some policymakers are concerned that inflation may remain persistently low. The study further indicates that the sectors most affected by tariffs, such as machinery, automotive, and chemicals, are precisely those that respond most quickly to interest rate adjustments. This provides potential space and justification for the European Central Bank to use monetary policy tools to buffer external trade shocks. Tariff Shock Suppresses Price Levels According to Reuters, the research by European Central Bank economists indicates that the U.S. tariff policies imposed on multiple countries are having multiple effects on the Eurozone economy. Although there were previously differing assessments among ECB officials regarding the impact of tariffs, this study clearly shows that the demand reduction effect they trigger has become dominant. The U.S. currently maintains a 15% basic tariff on EU goods. Over the past year, trade data has fluctuated significantly, as companies made advance purchases to avoid tariffs, followed by a phase of inventory digestion. The latest trends indicate that in the most recent three months for which data is available, Eurozone exports to the U.S. have decreased by approximately 6.5% year-on-year. This study, published on the ECB blog, does not represent the official position of the central bank but provides important quantitative references for assessing the net impact of tariffs on inflation. Interest Rate Sensitive Industries Become Key The research found that the industries most significantly impacted by U.S. tariff shocks, mainly including machinery, automotive, and chemicals, are also highly sensitive to interest rate changes. Economists analyze that although the output of these industries may significantly contract due to tariffs, they can also respond positively to a decrease in financing costs. Statistics show that industries with these characteristics account for about 60% of the study's coverage, with their industrial output making up 50% of the Eurozone total, and their share of total exports to the U.S. reaching about half. This means that the European Central Bank can partially buffer the negative impact of tariffs on these key industries through interest rate cuts, supporting economic vitality while also helping to prevent inflation levels from slipping further.