ECB president Christine Lagarde says trade restrictions will bring back inflation

ECB President Christine Lagarde has warned that rising trade restrictions could drag inflation back to life and hit the global economy hard.

Speaking at the IMF’s annual meetings, Lagarde made it clear that international cooperation isn’t just a “nice-to-have.” She believes it’s “crucial” if we want global growth to stay on track.

“Legitimate concerns about security and supply chain resilience can’t push us toward a spiral of protectionism,” Lagarde said.

She added that more trade barriers could make everything pricier by jacking up costs for businesses that rely on imported materials and narrowing the pool of suppliers. This, she pointed out, would tie the hands of central banks when trying to manage inflation.

Global trade barriers have been quietly stacking up over the past decade, fueled by growing mistrust. Major economies aren’t too eager to lean on one another for critical goods like semiconductors, especially from countries with tense diplomatic ties.

And since Russia’s invasion of Ukraine, the world has only seen more of these issues pile up. The ECB’s economists have calculated that if countries start throwing up barriers around “strategic products,” we could be looking at a GDP loss equivalent to 6% globally.

In a worst-case scenario (full-on decoupling) they estimate that figure would skyrocket to a 9% GDP loss. Lagarde’s timing on this warning is no coincidence either. With the U.S. elections just days away, Donald Trump is back on the campaign trail, pushing for more tariffs against China and other nations.

If he wins, the eurozone’s already weak domestic demand could take a bigger hit, especially if tariffs slam its exports to the U.S. next year.

ECB faces tough choices on interest rates

Under Lagarde, has been wrestling with inflation. In October, they pulled a bold move: back-to-back rate cuts for the first time in 13 years. It’s been a series of cuts, all designed to counter reduced inflation risks and a bleak economic outlook.

Inflation was revised down to 1.7% in September, way below the ECB’s 2% target and a huge drop from the 2.2% seen in August. Mario Centeno, head of Portugal’s central bank, said, “The truth is that the print of inflation in September was very low, way lower than what we were expecting.”

And while Centeno sees some room for cautious optimism, he left the door open for a bigger rate cut. “After that, we need to look at the incoming data,” he said, hinting that a 50-basis-point cut could be on the table in December if the data backs it up.

Dutch ECB Governing Council member Klaas Knot shares this view. “A half-point interest rate cut could not be excluded,” he said, though he added that this would hinge on the data pointing toward a downturn. 

Knot even suggested that the ECB might be close to hitting its 2% target next year, but the data would have to back that up in December. He described the scenario as one where the ECB could “gradually take our foot off the brake” and inch toward a neutral rate where they’re not stimulating or slowing down the economy.

Split views on the way forward

The ECB’s council isn’t singing the same tune though. Some members are dead set against a drastic cut, seeing it as a risky move in these “uncertain times.” Knot described their current approach as “meeting-by-meeting and data-dependent,” which he believes has served them well.

He took a dig at market expectations, calling them “over-enthusiastic” after weak PMI and consumption numbers led to more talk about rate cuts.

In an Amsterdam-style understatement, he summed up the eurozone’s outlook as “not as bad as some people would have you believe, but it’s definitely not great.” But he warned that the economy needs to see prices in services and wage growth ease to hit that target sustainably.

On the policy front, Knot said, “Policy restriction may be reduced more quickly if incoming data indicates sustained acceleration in disinflation or a material shortfall in the economic recovery.”

Lithuanian ECB Governing Council member Gediminas Šimkus has a cautionary stance on big cuts. “We are moving towards the direction of easing monetary policy,” he said.

When asked about market expectations, he admitted discomfort, calling the push for big cuts “not grounded unless we see something unexpected and bad in the data.”

Joachim Nagel, head of Germany’s Bundesbank, shares Šimkus’s reservations about predicting future cuts. “We are living in a very uncertain environment, so we have to wait for the new data and then we have to decide,” he said.

That uncertainty is reflected across the ECB, as three senior officials spent last week cooling off market speculation. They stressed that the ECB is sticking to its cautious, data-first approach ahead of the crucial December meeting.