When US President Donald Trump announced sweeping new tariffs on 2 April, the world braced for a fresh surge in inflation, but three weeks later, a growing number of economists and policymakers see the opposite happening.
Far from stoking inflation, tariffs could end up being the trigger that pushes European interest rates even lower.
European Central Bank (ECB) officials have already begun adjusting their tone. Earlier this month, the Governing Council unanimously cut the deposit facility rate by 25 basis points to 2.25%, with ECB President Christine Lagarde hinting that a 50-point move was also discussed.
The US tariff announcement appears to have tilted the stance in Frankfurt, with policymakers now prioritising downside growth risks.
“We’re seeing the tariff impact in PMI numbers, in intentions to purchase, intentions to hire,” Lagarde said in an interview with The Washington Post this week, adding that “tariffs are probably more disinflationary than inflationary.”
Lagarde also indicated that the ECB is likely to downwardly revise its growth outlook in its upcoming June meeting.
Oil prices have fallen more than 15% since early April, while the European Dutch TTF natural gas benchmark has dropped over 22%.
This cooling in energy markets reflects expectations of slower global growth, particularly if US tariffs restrict trade flows and reduce business confidence.
At the same time, the euro has strengthened against the dollar, thus limiting imported inflation.
Another force fuelling disinflation, especially in Europe, is the expected redirection of global goods.
Goldman Sachs economist Giovanni Pierdomenico said that US tariffs will create around $300 billion (€280 billion) in excess global supply. With US demand falling, some of that surplus, especially from China, is likely to find its way to Europe.
Past episodes suggest about 15% of excess supply ends up in the euro area, equivalent to a 1.5–2% increase in goods supply. “We estimate this should translate into around -1.5% of downside to the price level of core goods, corresponding to -0.5% downside to core HICP,” Pierdomenico said.
“China will have overcapacity, will want to reroute its exports somewhere, possibly to Europe. That would have a dampening impact on prices,” Lagarde said.
With inflationary pressures easing, markets are increasingly betting that the ECB will deliver additional rate cuts before year-end. Bank of America now expects the deposit rate to fall to 1.25% by December, citing “lower growth, even lower inflation, and policy rates to drop” further.
