 "Trump's win in US elections wreaks havoc on global rate-cut expectations")
By Katia Dmitrieva and Tom Rees
Central bankers the world over are gauging whether their worst fears over Donald Trump will come to pass following his resounding return to the US presidency.
Trump has promised levies on US imports that would upend global trade, tax cuts that would further stretch the federal budget and deportations that could shrink the pool of cheap labor.
That poses two main risks: Slower economic expansion around the world and faster inflation at home that would make the Federal Reserve less willing to lower interest rates. The upshot could be a stronger dollar and reduced scope for developing nations to ease their own monetary conditions.
“If a jurisdiction as important as the US imposes tariffs of 60 per cent to any other important jurisdictions — let’s speak about China — I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,” European Central Bank Vice President Luis de Guindos said Wednesday in London.
In Europe, Goldman Sachs Group Inc. penciled in an additional ECB rate cut, citing softer economic growth as a result of Trump’s policies. Economists at Nomura Holdings Inc., by contrast, now expects just one cut from the Fed next year, from four projected before the election.
Officials in Indonesia and Japan flagged they were ready to act to protect their currencies. Faced with massive tariffs, expectations also built that China may loosen more than it had planned. Not all regions have that luxury, however. Emerging markets, eager to support their currencies, may get more hawkish.
The risks are particularly acute because inflation is already proving a challenge for many countries — even before any potential levies. Find special coverage on US Presidential Elections here
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Almost two-thirds of central banks are still missing their price targets and cutting into an historically tight labor market, according to economists at UBS Group AG. Stronger economic growth in the US and a boost to Chinese consumption from fiscal stimulus could leave inflation “stranded” above officials’ targets, they said in an October note that analyzed various scenarios for the global economy.
Monetary officials got a glimpse of what may be to come on Wednesday. The dollar posted its biggest gain against major currencies since 2020, while a surge in Treasury yields prompted some authorities in Asia to pledge steps to protect their currencies.
China slashed its yuan fixing rate to the weakest since 2023 Thursday, signaling the central bank is allowing some depreciation to contend with the US tariff risk. In the world’s second-largest economy — which has been firmly in Trump’s tariff cross hairs— state-owned banks also sold dollars to support the yuan Wednesday after it weakened more than 1 per cent, according to traders who didn’t want to be identified.
The People’s Bank of China may have to ease policy more rapidly — potentially denting the yuan, according to Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. But nearby central banks may be less keen to do so if the Fed slows its own campaign.
“US markets may be cheering, but economies across Asia could be big losers,” Garcia-Herrero said by phone. “Trump’s policies would mean less room to cut just as central banks need it the most.”
Building Defences
In South Korea, officials are bolstering economic defences, according to Finance Minister Choi Sang-mok, who said the government is initiating new consulting bodies to oversee foreign exchange markets, trade strategies and industrial competition.
“If the policy stance that’s been stressed by president-elect Trump becomes realized, the impact on our economy is expected to be significant,” he said Thursday.
Reserve Bank of India Governor Shaktikanta Das was more upbeat a day earlier, telling guests at an event in Mumbai that his country is “well placed” and “very resilient” to deal with election spillovers and other global issues.
What Bloomberg Economics Says...
“Trump’s election victory may herald a broad-based surge in tariffs for the global economy: he’s threatened to raise tariffs to 60 per cent on goods imported from China and 20 per cent for the rest of the world. That would bring average US levies above 20 per cent, a level not seen since the early 20th century. America’s closest partners, Mexico and Canada, would be hardest hit. For most other countries, a relatively small shock to GDP would mask a big shift in trade flows away from the US.”
The election tremors were felt in Europe, too — particularly in the east, which fears reduced US support for Ukraine as it tries to fend of Russian forces. Concerned about frostier ties between Washington and Brussels, traders drove the euro toward parity with the dollar.
The shadow of tariffs risks complicating the task of taming inflation without undermining economic growth. While Guindos said he expects price growth to quicken, he stressed that no conclusions can be drawn before exact policies are clear.
“There are two main fears here,” he said. “The first one is tariffs and protectionism that could have a detrimental impact on growth and inflation. And simultaneously fiscal deficits. You’ve seen the reaction of markets to the fiscal deficits in the US, the UK.”