MNI SOURCES: ECB Sees Slightly Disinflationary Tariff Hit

Most members of the European Central Bank’s Governing Council are likely to regard Greenland-related tariffs on trade between some EU countries and the U.S. as somewhat disinflationary, though a minority will be worried about supply chain issues which could push up prices, Eurosystem sources told MNI.

“Assuming the picture is similar to last year, around 65/70% of the Governing Council will lean dovish on the impact, thinking overall it will be disinflationary, whilst 30 to 35% will lean hawkish,” one official said. “As of now, nothing has changed immediately. We have said continuously the only certainty is uncertainty and that is exactly where we are.”

Sources agreed that any additional tariffs resulting from the U.S. push to acquire Greenland will deliver a “devastating blow” to confidence just as policymakers had hoped that the economic outlook was stabilising, and at a time when they had perceived monetary policy to be “in a good place” with the deposit rate at 2%. The confidence hit would be greater than the one seen between last year’s April 2 “Liberation Day” tariffs announcement and the U.S.-EU trade agreement reached between Washington and Brussels in July, two officials agreed.

Along with the hit to growth and to confidence in the short term, many policymakers will also expect trade tensions to weigh on inflation expectations, particularly if the euro appreciates against the dollar.

“That will certainly be impacted initially by the currency and financial conditions tightening if yields rise,” an official said. (See MNI INTERVIEW: Tariff War Pushes Up Inflation- ECB's Pelagidis)

LONGER TERM

In the short-term, the biggest economic challenges will come from U.S. tariffs imposed on European exports, with the EU’s retaliation taking time to materialise, especially in the case of its never-yet-used anti-coercion mechanism, one source said. The ACI is not an automatic tool, but rather aims to open a dialogue with the country in question before any eventual countermeasures or demands for compensation, the official noted, adding that reaching that point could take up to a year.

While it is still unclear how many of the euro area countries that Trump has threatened will ultimately be affected, this new flare-up of tariff tensions could mean lower inflation and growth for the euro area in 2026, the official went on. However, in the longer term, restrictions on trade could prompt higher prices as well as lower growth, the official said.

An ECB spokesperson declined to comment.