Euro Zone Inflation to Take a Hit from Tariffs but Rate Cuts Could Offset

• U.S. tariffs are weighing on eurozone growth and inflation, but the most affected sectors are also sensitive to interest rates, so cutting borrowing costs could offset the downward price pressures.
• The U.S. imposed tariffs on most trading partners last year, and European Central Bank (ECB) officials have been studying their likely impact, often coming to opposing conclusions as trade barriers affect the economy on multiple levels. However, a study done by ECB economists concluded that the drop in demand due to tariffs outweighs any inflation-boosting supply effects, creating a drag on prices.
• Notably, trade data has been volatile over the past year as firms frontloaded purchases to avoid tariffs, which stand at 15% as a baseline for EU goods entering the U.S., then ran down stocks. However, in the latest three months for which data is available, eurozone exports to the U.S. are down about 6.5% from the same period a year earlier.
• These findings are significant since eurozone inflation fell to 1.7% in January 2026, below the ECB's 2% target, and some policymakers fear that inflation could fall further. The good news for the ECB is that sectors hit hardest by the tariff shock also respond most strongly to interest rate changes. These sectors include machinery, autos, and chemicals.
• Output may drop sharply due to tariffs but expands strongly in response to lower borrowing costs. "We find that this pattern holds for about 60% of the sectors we study – representing roughly 50% of total average euro zone industrial output and of total goods exports to the United States," the economists said.

 (Source: Reuters)