Trump's victory shakes global rate-cut expectations amid trade and inflation concerns

Donald Trump's return to the US presidency has sent shockwaves through global financial markets, leaving central bankers worldwide grappling with the potential fallout of his economic policies, as detailed in a report by Bloomberg.

A renewed focus on tariffs, tax cuts, and stricter immigration policies has prompted fears of slower global growth and faster inflation, both of which could complicate central banks' ability to adjust interest rates in response, the Bloomberg report explained further.

Trump’s policies can strengthen dollar and tighten global liquidity

Trump's promises to impose steep tariffs, including up to 60 per cent on Chinese goods and 20 per cent on imports from other nations, are expected to disrupt global trade flows. This protectionist stance could hurt economic expansion, particularly in Europe and emerging markets, while driving inflation in the US higher domestic prices would make the Federal Reserve less likely to ease rates, further strengthening the US dollar and tightening global liquidity.

The European Central Bank (ECB), already concerned about slowing growth, has factored in the potential for additional rate cuts in response to Trump’s trade policies. Goldman Sachs predicts a further reduction in ECB rates, while China, facing tariffs on its exports to the US, may need to ease monetary policy more aggressively, putting pressure on the yuan. However, this could limit the room for movement in other regions, especially emerging markets, where central banks are increasingly focused on stabilizing currencies.

Central banks in Asia are already facing the heat

Central banks in Asia are already feeling the pressure. As Trump’s election results began to settle in, the US dollar surged against major currencies, triggering interventions by authorities in Asia to support their domestic currencies. In India, Reserve Bank Governor Shaktikanta Das expressed confidence in the country’s resilience but acknowledged the potential for volatility, with the Indian rupee spiking before calming, suggesting the RBI may have intervened in the market.

Similarly, China’s central bank stepped in to stabilize the yuan, which weakened over 1 per cent following the election. While the People's Bank of China (PBOC) may need to accelerate its policy easing to counteract the impact of tariffs, this could create additional stress for neighboring economies, which may be reluctant to follow suit, particularly if the US Federal Reserve slows its own rate-cutting cycle.

Trump’s policies can lead to a sharp escalation in tariffs

Bloomberg Economics warns that Trump's protectionist policies could lead to a sharp rise in tariffs, potentially reducing US trade volumes with key partners such as China, Canada, and Mexico. A significant increase in US tariffs could disrupt trade flows, harm global growth, and drive inflation higher, particularly in countries reliant on exports to the US. The People’s Bank of China may be forced to act quickly, but other central banks may be less inclined to cut rates, even as inflationary pressures mount.

Elsewhere, concerns about the global economic impact of Trump’s victory were felt in Europe, particularly in the east, where fears of reduced US support for Ukraine are growing. The Euro weakened significantly against the dollar, with traders bracing for the potential economic fallout of Trump's trade policies. Similarly, in Australia, the Reserve Bank is monitoring the potential impact of tariffs on China, with concern that a trade war could hurt the Australian economy.

Therefore, as central banks navigate the uncertain aftermath of Trump’s election, the global financial system faces a challenging balancing act.

The twin challenges of managing inflation and maintaining growth could lead to a tightening of monetary policy in some regions, while others, particularly in emerging markets, may struggle to protect their currencies from the strong US dollar.