The Different Responses of Global Central Banks to Escalating Trade Wars

The European Central Bank and the Bank of Canada have adopted different strategies in dealing with the trade war escalation, despite both facing the threat of economic downturn. As reported by Bloomberg on Saturday (19/4/2025), the European Central Bank (ECB) has decided to reduce its benchmark interest rate for the seventh time since June of the previous year. This decision was influenced by the additional challenges faced by Europe, leading the market to anticipate further easing of monetary policy.

In contrast, the Bank of Canada has opted to maintain its stance on interest rate cuts in response to the repercussions of tariffs imposed by the United States, which are feared to trigger an economic recession.

Various central banks around the world made decisions regarding their benchmark interest rates recently. The European Central Bank and the Bank of Canada chose to keep their rates unchanged. Similarly, central banks in South Korea, Botswana, and Namibia also decided to maintain their benchmark rates. On the other hand, Egypt and Denmark decreased their rates, while Turkey surprised markets by increasing its rates.

In the United States, Mary Daly, the President of the Federal Reserve Bank of San Francisco, expressed that the Federal Reserve is likely to keep interest rates steady until the end of the year. This decision is influenced by concerns about potential inflation growth resulting from the reciprocal tariffs imposed by President Donald Trump. Daly highlighted that the risk of inflation rising this year is greater compared to the previous year. Consequently, the Federal Reserve will need to uphold a tight monetary policy for a longer duration than initially anticipated.

During an event at the University of California, Berkeley on Friday (18/4/2025), Daly mentioned that although tight monetary policy is currently in place, it is not meant to be permanent as inflation is expected to decrease eventually. He expressed his confidence in the Federal Reserve's March Summary of Economic Projections, which indicated the possibility of two 25 basis points rate cuts for the remainder of the year.

Daly highlighted that if inflation does decrease as anticipated, the Fed will gradually reduce interest rates to boost economic activity. However, he emphasized the importance of patience, stating that there is no urgency to make immediate changes. According to him, the Federal Reserve has the flexibility to wait and assess the situation before taking any further actions to combat inflation. Daly believes that the central bank is well-positioned to make informed decisions regarding maintaining a tight monetary policy to address inflation concerns.