Recent commentary from Pierre Wunsch, a key member of the European Central Bank (ECB) Governing Council and Governor of the National Bank of Belgium, highlights the complexities introduced by U.S. President Donald Trump’s tariff policies in shaping the future of ECB interest rates.

Wunsch spoke to CNBC, expressing that prior to the announcement of tariffs, the ECB was progressing towards stabilization. “We were going in the right direction,” he stated, emphasizing a previously cautious optimism about inflation trends for 2025. However, the introduction of tariffs adds uncertainty to the economic landscape, complicating monetary policy considerably.

Wunsch articulated concerns that tariffs may hinder growth while potentially leading to inflation. Despite these risks, he noted the unpredictable nature of their effects, which would largely depend on retaliatory measures and fluctuations in exchange rates.

Trump’s recent decision to impose a 25% tariff on foreign-made vehicles, effective April 2, has further aggravated these concerns. In tandem, Trump warned of “far larger” tariffs should the European Union and Canada collaborate against U.S. trade measures, marking a turbulent phase in international trade relations.

The forthcoming April 2 date is critical as it is likely to trigger a series of trade duties; however, adjustments may still be forthcoming from the U.S. administration in response to market dynamics.

The ECB is slated to announce its next interest rate decision on April 17, shortly after the tariffs are implemented. Current market sentiments suggest a 79% probability of a 25-basis-point cut in rates, according to LSEG data.

Wunsch anticipates that the central bank will assess the tariffs’ effects by this time, which could influence its monetary policy decisions. Nevertheless, he cautioned against hyper-focusing on the immediate situation in April, pointing out that trade policies often yield medium-term consequences.

He outlined that the ECB remains open to a range of responses regarding interest rates—whether further cuts, halting them, or even a possible rate hike. Wunsch mentioned, “If tariffs have an inflationary impact and a negative impact on growth, it’s going to be a difficult equation.” While he is not advocating for a pause in rate adjustments, he believes it should be part of the dialogue.

Wunsch also brought to light potential mitigating factors from recent developments in fiscal policy across Europe. Notably, Germany’s recent constitutional changes allow for increased defense spending and the establishment of a significant infrastructure fund, projected at €500 billion ($539 billion).

Additionally, the European Commission’s commitment to mobilizing approximately €800 billion for defense initiatives suggests a substantial shift in fiscal strategy. Wunsch indicated that these efforts could substantially counterbalance the negative impacts of U.S. tariffs within the medium term.

This raises the possibility that the net effect of tariffs could tilt towards fueling inflation rather than stifling growth, emphasizing the need for a long-term perspective beyond immediate policymaking. “The risk might be on the upside on the inflation front,” he concluded, advocating for comprehensive assessments over the coming years.