Fresh Tariffs to Have Muted Inflation Impact in Europe

• Escalating transatlantic trade tensions are not expected to have a significant impact on the inflation outlook, according to the European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau.
• On January 17, 2026, US President Donald Trump announced that he would implement a 10% tariff on eight European countries that oppose his desire to purchase Greenland, with the tariff rate set to rise to 25% in June 2026. Trump’s tariff threats over Greenland, and European pledges to retaliate, are set to rekindle the debate over risks to the eurozone’s 21-nation economy.
• Tariffs already in place have so far not resulted in major consequences for prices in Europe, according to Villeroy, the Bank of France chief, who also noted that any new levies would likely only have a “muted” influence. Last ‌year's ‌tariffs did not have an impact on eurozone inflation as ⁠they ⁠were ​mostly paid by U.S. consumers, and a similarly muted price ‍outcome is expected.
• Notwithstanding, if there are additional tariffs, all the effects should be assessed. While there could be limited direct inflationary effect, there could also be an appreciation of the euro, which plays in the opposite direction.
• Judging dangers to inflation and growth to be broadly balanced, ECB policymakers have kept interest rates on hold since June 2025, indicating there is little chance of a change anytime soon. The ECB policymakers have been reassured by inflation that is only a touch short of their 2.0% target, while economic expansion has picked up pace, despite the initial trade storm in 2025.
• Notwithstanding, the ECB must remain nimble in an environment of heightened global uncertainty. There are downside risks on inflation that remain at least as significant as upside risks.

(Sources: Bloomberg & Reuters)