Europe’s central banks are scrambling as Donald Trump prepares to step back into the White House. His incoming presidency has reignited fears of trade wars, geopolitical tensions, and currency volatility.
Policymakers across the continent are in damage-control mode, slashing interest rates and signaling further cuts to shield their fragile economies.
The Swiss National Bank (SNB) shocked markets with a half-point cut, bringing rates to 0.5%. This level hasn’t been seen since September 2022, back when Switzerland ended its eight-year experiment with negative rates.
Meanwhile, the European Central Bank (ECB) followed up with its own quarter-point reduction, dropping its key rate to a 1.5-year low. Christine Lagarde, ECB President, laid out the game plan: “The direction of travel currently is very clear.” The cuts are expected to continue into 2025, with insiders hinting at similar actions in January and March.
Currency chaos and Swiss fears
The Swiss franc, often seen as a safe haven during global crises, has become a source of anxiety for the SNB. Antoine Martin, the bank’s vice president, bluntly stated that external risks pose the biggest threat to Switzerland’s economy.
The SNB is prepared to do whatever it takes to stabilize the franc, including more rate cuts, intervening in currency markets, or even bringing back negative rates.
Martin Schlegel, SNB President, warned traders not to test the central bank’s resolve. “Developments abroad represent the main risk,” he said, pointing to Trump’s return as a potential trigger for currency speculation.
Switzerland relies on open and stable global markets, and any disruption from Trump’s trade policies could hit its economy hard.
ECB braces for economic fallout
The ECB, already facing weak economic growth and sluggish inflation, is now staring down an even bigger problem: Trump’s trade policies. The central bank cut its deposit rate by 25 basis points, bringing it down to 3%. That was the third consecutive rate cut, totaling 100 basis points since June.
Lagarde made it clear that the ECB is moving away from restrictive monetary policies. The bank’s latest projections paint a bleak picture. Eurozone growth for 2025 is now expected to hit just 1.1%, down from an earlier forecast of 1.3%.
Inflation is stuck at 2.3%, with the risk of falling further below the bank’s 2% target. Economists at ABN Amro described Trump’s tariffs as a “disinflationary shock,” predicting even looser monetary policies to offset the fallout.
Investors are betting that ECB rates could drop to as low as 1.75% by late 2025. But some think even that might not be enough.
Global domino effect
Europe isn’t alone in trying to Trump-proof its economy. Canada’s central bank preemptively cut rates by 50 basis points this week, citing fears of higher tariffs from its southern neighbor.
Brazil, facing its own fiscal turmoil and Trump’s warnings to BRICS countries not to challenge the U.S. dollar, took a different approach, raising rates by 100 basis points to steady its currency.
The ECB, however, has unique challenges. While growth in the eurozone unexpectedly ticked up in the third quarter, recent data shows cracks forming, particularly in the services sector. Manufacturing has already been weak for months.
Fabio Panetta of Italy and Francois Villeroy de Galhau of France have hinted at more aggressive rate cuts to spur growth, while Germany’s Joachim Nagel warns against going too far.
Investors and policymakers alike are watching Washington closely, knowing that January 20, the day Trump takes office, could bring sweeping changes to the global financial system.
Meanwhile, the Federal Reserve is expected to follow suit with a rate cut next week after U.S. inflation data came in as expected. Central banks worldwide are moving preemptively, knowing that Trump’s policies rarely follow conventional wisdom.
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