Lagarde: The European Central Bank will continue to gradually cut interest rates, and Europe must prepare for Trump's tariffs

On Wednesday, European Central Bank President Christine Lagarde stated in a media interview that Europe must prepare for potential tariffs imposed by the United States, while also indicating that the ECB will continue to gradually lower interest rates and is not overly concerned about the impact of U.S. inflation on Europe.

Europe Must Be Cautious of Trump's Tariff Threats

Since the inauguration ceremony on Monday, Trump has repeatedly threatened to impose tariffs on goods imported from the EU to the U.S., claiming that the EU is "very, very unfriendly" to the U.S., and therefore will be subject to tariffs.

However, no specific actions have been taken yet. Lagarde stated:

"It was very wise for Trump not to impose a package of tariffs on the first day of his presidency, as this may not necessarily yield the expected results... The theory of reducing imports from Europe to enhance U.S. manufacturing is questionable, as the U.S. economy is currently almost overheating."

She also warned that with the U.S. unemployment rate being very low and capacity nearly at full operation, it would take time to replace imports with domestic production. Moreover, importers are unlikely to operate at low profit margins for long, ultimately "the costs will be passed on to consumers."

Nevertheless, Lagarde still urged Europe to "be vigilant against the threat of tariffs," predicting that Trump's tariffs will be "more selective and targeted," thus Europe must "be prepared and anticipate what will happen" in order to respond.

EU Economic Affairs Commissioner Valdis Dombrovskis also stated that if necessary to defend the EU's economic interests, the EU will take "corresponding measures" in response.

ECB Will Continue to Gradually Lower Interest Rates

Notably, according to CCTV News, prior to Trump's inauguration, U.S. Treasury Secretary Janet Yellen had indicated that if the new U.S. government implements its tariff plans, it could undermine the progress made in curbing inflation in the U.S., adversely affecting competitiveness in some sectors of the U.S. economy, and significantly increasing costs for American households and businesses.

Regarding the potential impact of U.S. inflation risks, Lagarde stated, "If U.S. inflation rises again, it will certainly pose problems for the U.S. itself," but the ECB is "not too worried" and will continue to gradually lower interest rates. She said:

"The direction is very clear. The pace of rate cuts will depend on the data. But for now, gradual adjustments are definitely something to consider."

Lagarde emphasized that policymakers are confident that the inflation rate will reach the ECB's target of 2% by 2025, and defined the controversial "neutral interest rate" as being between 1.75% and 2.25%, slightly lower than the range of 1.75% to 2.5% proposed last December. Last year, the ECB cut rates four times, bringing the key rate down to 3%, with market expectations that it will further decline to 2% by September 2025.

She also stated that the ECB will closely monitor so-called "lagging" factors such as services, energy, wages, and insurance to observe whether service prices can gradually decline as expected by early 2025