Dutch ECB Governing Council member Klaas Knot warned today that the escalating trade war constitutes a “negative supply shock” and should be considered “stagflationary” in nature.
Knot also cautioned that as time progresses, the economic impact is more likely to “more inflationary rather than deflationary”.
ECB’s priority, he said, is to monitor how and when these tariffs start to meaningfully affect economic activity and corporate decision-making.
However, next week’s policy meeting would be too soon to revise projections.
Knot also noted that despite the growing market stress, financial market functioning has so far been “preserved”. He credited the hedge fund sector’s proactive deleveraging for this resilience, saying they were well-prepared for the turbulence and capable of meeting margin calls—unlike in past market episodes.
