ECB ‘ready’ to intervene if tariff war threatens financial stability

The European Central Bank is ready to act should US President Donald Trump’s tariff blitz threaten financial stability, ECB chief Christine Lagarde said on Friday.

The ECB “is always ready to use the instruments that it has available”, Lagarde said in Warsaw, after talks with eurozone finance ministers about how Europe can avert a trade war − or protect its economy if negotiations to avoid US levies fail.

“What we have observed recently, of course, is a degree of volatility,” she told reporters.

“But in Europe, and in the euro area in particular, we have observed that market infrastructures and functioning of markets, including the bond markets, is functioning in an orderly fashion,” Lagarde said.

Her comments come less than a week before the ECB’s next meeting to decide on monetary policy, with European stock markets struggling for direction in early afternoon deals, and the dollar dropping to the lowest level against the euro in more than three years.

Although Trump announced a 90-day pause of his stinging universal tariffs, a trade war between China and the United States has continued to escalate with tit-for-tat levies.

With no end in sight, their fight has caused jitters in markets, especially Asia.

Lagarde was joined by top EU officials including economy commissioner Valdis Dombrovskis, who warned that US tariffs would hit the European Union’s economic growth.

According to EU estimates, the bloc could see a hit to economic growth of 0.2 percentage points, spread over the period from now until 2027, if the situation does not improve or deteriorate.

“If tariffs are perceived to be permanent or if there are further countermeasures the economic consequences would be more negative”, Dombrovskis said, this could rise to “0.5-0.6 per cent for the EU and 1.2 per cent for world GDP” over three years.

Markets have endured a brutal week, marked by the eruption of an all-out trade war and a bond market selloff that has ignited fears of a global recession and shaken confidence in US assets.

“In Europe and in the euro area in particular, we have observed that market infrastructures and... the bond market (are) functioning in an orderly fashion,” Lagarde told a press conference in Warsaw.

The dollar slid to multi-year lows against most currencies on Friday and Treasuries sold off as investors sought safer haven assets, bracing for even more volatility in U.S. assets.

Lagarde said the ECB did not target any particular exchange rate but remained attentive to movements since they impact inflation and needed to be factored into economic models.

The euro’s trade-weighted exchange rate hit an all-time high this week, which is likely to lower inflation since these movements make imports cheaper but could also slow economic growth since exporting goods becomes more expensive.

This is one of the key reasons why financial investors now think a rate cut by the ECB next week is essentially a done deal, to be followed by more easing later in the year.

Eurozone bond yields were stable on Friday after a turbulent week as a temporary pause in some of US President Donald Trump’s broader tariffs did little to quell market worries about a US-China trade conflict and the risks to the global economy.

As investors sold US bonds and the dollar, the premium that holders of Treasuries demand to hold US debt rather than German Bunds rose by the most in a week since the 1990s.

The German 10-year bond yield, the benchmark for the Eurozone bloc, was little changed at 2.584%. Germany’s bond market sat out a global selloff on Wednesday, when US yields surged and the gap between the German and US 10-year yields widened.

“If we look at how the German bond market has evolved this week, it’s been, I would say, reassuring that it hasn’t been fully caught in what’s been happening in the global markets and that is kind of an exception,” Jan Von Gerich, chief market strategist at Nordea, said.

“The moves that we’ve seen in other markets haven’t really been...illustrative of a healthy and well-functioning market.” On Friday, selling in US bonds resumed, with the 10-year note yield rising to 4.427% and the spread between German and US 10-year Treasuries widening to 183 bps. It has risen by more than 40 bps in this week alone, its largest such increase in at least 30 years, LSEG data shows.

Bunds rose only 3 bps this week, as investors flocked to safe havens beyond the US market, given the aggressive selloff in Treasuries.

Italy’s 10-year yield was higher by 6 basis points at 3.866%. The gap between Italian and German 10-year bunds, a gauge of the premium that investors demand to hold Italian debt, widened to 128 bps.

Agencies