Trade war could leave Europe in recession with high inflation, ECB policymaker warns

NICOSIA (Reuters) – Europe will suffer in case of a fresh trade war with the United States, and could face a recession coupled with high inflation, Cypriot central bank Governor Christodoulos Patsalides said on Thursday.

Incoming U.S. President Donald Trump promised to impose tariffs on most imports and said Europe would pay a big price for having run a huge trade surplus for years.

“Trade tensions are rising,” Patsalides told a conference. “If trade restrictions materialise, the outcome may be inflationary, recessionary or worse, stagflationary,” Patsalides said.

Still, the ECB could for now continue to lower interest rates with the next move possibly coming in December, Patsalides added.

While growth in the euro area economy has been anaemic for some time now, the approach to rate cuts must be gradual and data driven,” Patsalides said. “If incoming data and new projections in December confirm our baseline scenario, there would be room to continue lowering rates at a steady pace and magnitude.”

The ECB has cut rates by a combined 75 basis points to 3.25% this year and investors have fully priced in another move on Dec 12, with most also expecting cuts at each policy meeting through next June.

But Patsalides also warned that inflationary pressures, particularly from potential supply shocks, still pose a risk as does the sticky nature of services price growth.

Inflation has fallen rapidly in recent months and was now expected to oscillate around the 2% target in the coming months. It could then settle at the target in the first half of the 2025, earlier than the ECB last predicted.

(Reporting by Michele Kambas; Writing by Balazs Koranyi; Editing by Bernadette Baum and Peter Graff)