U.S. President Donald Trump’s trade war is driving central banks across Europe to support their economies by cutting interest rates — even as it ties the hands of the Federal Reserve.
Central banks in Switzerland, Sweden and — for the first time in five years — Norway have all cut their official interest rates this week, adding to similar moves last month from the European Central Bank and the Bank of England.
All five have cut their growth forecasts in recent weeks. The common theme has been that uncertainty over the trade outlook has undermined confidence and depressed activity since Trump’s “Liberation Day” tariff announcement on April 2.
By contrast, the Federal Reserve is still to lower interest rates this year, even though the same factors also weigh on the U.S. economy. That’s because the breadth and scale of Trump’s tariffs appear certain to drive inflation higher in the U.S.
“Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs,” Fed Chair Jerome Powell told reporters on Wednesday, after the U.S. central bank left the target range for fed funds at 4.25 percent to 4.50 percent. At their meeting, Fed policymakers had revised their forecasts for inflation higher in 2025 and 2026, and signaled that rates would have to stay a little higher for longer as a result.
“Our obligation is to keep longer-term inflation expectations well anchored, and to prevent a one-time increase in the price level from becoming an ongoing inflation problem,” Powell said.
In that context, Powell stressed that the U.S. economy is still growing at a decent rate, while unemployment, at only 4.2 percent of the workforce, is low enough to let the Fed wait a bit longer before taking action.
The Fed’s caution has infuriated Trump, who has called Powell a “numbskull” and warned this week that he “may have to force something” if there is no movement soon.
“We have a stupid person, frankly, at the Fed,” he told reporters outside the White House ahead of the Fed’s decisions on Wednesday. “We have no inflation. We have only success. And I’d like to see interest rates get down.”
A different story
It’s a very different story across the Atlantic, where the first impact of tariffs has been felt on Europe’s export industry. Having rushed to ship products to the U.S. before tariffs took effect, they now face the prospect of a long wait for repeat orders. While central banks are still afraid that the trade war could disrupt global supply chains and add extra costs that would push inflation higher at some stage, right now, that’s a concern for another day.
“The economic recovery that began last year has lost momentum,” the Riksbank said on Wednesday, as it cut its key rate by a quarter-point to 2.0 percent.
“Following a strong first quarter, growth is likely to slow again and remain rather subdued over the remainder of the year,” the Swiss National Bank echoed Thursday morning, after taking its key rate down to zero from 0.25 percent.
In Norway, which had held out against cutting interest rates at all since the post-pandemic inflation surge, the central bank said the time had finally come to shift its stance. Norges Bank also said it will probably cut interest rates again in the course of the year.
The Bank of England, meanwhile, left its bank rate unchanged at 4.25 percent on Thursday, but it had already cut it in May, and Governor Andrew Bailey said in a statement that “Interest rates remain on a gradual downward path.” The European Central Bank also cut its key rate for an eighth time in the last year earlier in June, and analysts expect further cuts from both in the months to come (even if the ECB’s top brass isn’t so sure).
And as growth slows, inflation is now heading below where central bankers would like it to be, at least in the short term. The ECB sees it at 1.6 percent next year, before rebounding to its 2.0 percent target in 2027. In Switzerland, inflation has already turned negative on the year, at -0.1 percent in May.
To a large degree, this is because Trump’s policies have eroded confidence in the dollar itself. The greenback has lost nearly 9 percent against major Western currencies such as the euro, pound and Swiss franc this year, making the cost of many of Europe’s imports — especially commodities which, from oil to coffee, are priced in dollars — significantly cheaper in local terms.
“Due to the erratic and chaotic new policy style in the U.S., we have seen stronger European currencies,” said ING economist Carsten Brzeski, calling them an “important driver for disinflationary pressures in Europe.”
Indeed, the SNB‘s cut on Thursday aimed directly at reducing the attractiveness of the franc, which global investors see as a “safe haven.” SNB Chair Martin Schlegel acknowledged at his press conference that he may even have to cut his key rate to below zero again, although he said: “We will not take the decision to go negative lightly.”
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