The ECB has said that the direction of travel for monetary policy is clear, but the timing and extent of moves is not. What does this guidance mean to you? We are moving towards the target. The direction of inflation is clear, despite some small bumps.
All incoming information points to a convergence with the target in and this is what our models are also telling us. Our models include market expectations for the interest rate path, so this convergence with the inflation target is coherent with a declining interest rate path. Everything is of course contingent on the information at the time of the forecasts, and we will have a new forecast round in March. Does that mean implicitly that you are comfortable with market expectations for further rate cuts as they are embedded in the projections?
That was conditional on the information we had in December. I am comfortable as long as that path takes us to the target in the medium term in a sustainable way. Overall, I think the direction is the same. One thing that might happen is a trade war with the United States. How would that affect your thinking? It depends on details such as whether we retaliate, precisely what these tariffs are going to be levied on, and how China is affected. The price of goods will be higher in the United States.
Who is going to absorb the cost? It could be that European companies, in order to defend their market share, might be willing to sacrifice a bit of their margin in order to stay in the market. We have seen this many times and European firms have a great ability to adjust. Part of this sacrifice might be recovered through the exchange rate.
So, in the end, the overall impact may not be that big. What concerns me more is if President Trump engages in a full trade war with China. Trade barriers will force China to sell its goods elsewhere and the competition from China could be a serious threat to us.
