Trump’s tariffs have hurt less than expected so far, says ECB’s Kocher

VIENNA — Donald Trump’s trade war has been less damaging for Europe’s economy than widely feared, and there is a hope that a stable recovery is underway, European Central Bank governing council member Martin Kocher said.

 “We have not seen the strong reduction in growth rates and the inflationary effects of the trade conflicts that were anticipated in March and April,” the Austrian National Bank governor told POLITICO in an interview on Wednesday.

On the same day that a closely-watched business survey pointed to an unexpected and marked pickup in activity in October, Kocher suggested there were emerging signs of an economic pickup.

Kocher, who served as economy minister before joining the central bank in September, nonetheless warned against complacency. “I don’t want to sugarcoat what we are seeing,” he said. “This is the highest level of tariffs since the 1930s, and there will be effects on the world economy.”

The impact on the eurozone will be exceptionally difficult to predict because we have not experienced anything similar in nearly 100 years, Kocher said, adding that this was the primary reason for diverging views about the ideal monetary policy path ahead on the ECB’s governing council.

Falling inflation has allowed the ECB to cut its key deposit rate eight times since the middle of last year, bringing it down from a record-high 4 percent to 2 percent currently — a level that the Bank says is no longer restricting the economy.

A behavioral economist rather than a monetary one, Kocher is one of the newest faces on the governing council, having succeeded Robert Holzmann earlier this year. Most analysts expect a more moderate approach from him than from the veteran hawk Holzmann, who was often the lone dissenter on the rate-setting body.

The governor’s office leaves no doubt there is a change in style underfoot — the wooden desk replaced by a modern, height-adjustable table and new, colorful paintings by Austrian artists Wolfgang Hollegha and Hans Staudacher on the wall.

While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time.

“The difficulty is to assess whether most of the effects of the trade conflicts have already materialized or whether we will see them trickle down in the economy over the next couple of months and perhaps even years,” he said. “I’m convinced that we’ll see more effects over time. But whether they will be overall inflationary, or rather disinflationary in the euro area, is difficult to tell.”

Risky outlook

Kocher explained it’s reasonable to expect deflationary pressure from the rerouting of trade from China to Europe that was flowing to the U.S. before the trade conflict began, but it’s equally plausible that geopolitical conflicts may hamper supply chains and boost prices.

And things can change very fast. “Last week’s APEC summit with some interim agreement between the U.S. and China might have changed the outlook again,” he noted.

While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time. | Nikolay Doychinov/AFP via Getty Images

At the summit, the U.S. and China committed to lowering the temperature in their trade and tech rivalry. The so-called “Gyeongju Declaration” called for “robust trade and investment” and committed leaders to deepen economic cooperation.

In this environment, “we have to wait and see to what extent [risks] materialize” as it’s difficult to take rate decisions “primarily based on the risk outlook,” Kocher said.

As things stand, he said, the ECB would need to “see some risk materializing that would reduce … the GDP projection to a significant extent, and that would lead perhaps to some disinflationary effects” before it discussed cutting again.

The governing council next meets in December, when a new set of forecasts will include estimates for growth and inflation in 2028 for the first time.

Kocher warned against placing too much emphasis on the 2028 numbers, which many economists and investors focus on as an indication of whether the Bank is on track to meet its medium-term inflation target.

While the forecast will offer more certainty about the outlook for 2026 and 2027, that for 2028 will be little more than “indicative,” he argued. “You always have to take projections with a grain of salt. And the further away the projection horizon, the larger the grain of salt.”

Green battle continues

Kocher was speaking on the day that a majority of the EU’s 27 governments decided to water down their collective target for pollution reduction, seen by many as a sign that political momentum has swung after half a decade of green victories on climate policy.

But Kocher fiercely defended the ECB’s commitment to green central banking.

“Whatever is decided today, there’s no significant change in the targets of the European Union to become climate neutral in the near future,” Kocher said. And so long as it does not interfere with the ECB’s inflation-targeting mandate, the ECB has the “freedom” to support those objectives.

He said the governing council had reaffirmed the view, even in the last couple of months, that it is essential to take climate risks into account in its projections, citing the massive impact that extreme weather events can have on growth and inflation.

In contrast to his predecessor, Kocher also backs the inclusion of a climate criterion in the Bank’s collateral framework, a step that could one day make it more expensive for polluting companies than for green ones to borrow money.

Critics of green central banking have argued that it is up to elected politicians, rather than central bankers, to create incentives for green business. But Kocher, a former downhill racer who has seen Austria’s key tourism sector struggle with an ever-shorter ski season, is unconcerned. “As long as it does not create a trade-off with our inflation target, I am perfectly fine with it,” he said.