Central banks worldwide have the flexibility to further reduce interest rates, and a partial divergence from the U.S. Federal Reserve's policy may persist as it pauses its rate cuts, according to policymakers and analysts.
This divergence could impact U.S. President Donald Trump's trade tariffs by diluting their effect and potentially raising borrowing costs for U.S. companies and households.
The global economy's response to trade tensions is counteracting Trump's tariff intentions before they take effect, benefiting foreign companies selling to the U.S.
Switzerland and the euro zone are among the beneficiaries—with a weaker franc aiding Swiss exports and a depreciated euro helping European companies maintain market share despite higher tariffs.
Despite the inflationary tendency of a weaker currency, falling inflation rates due to trade disputes have not raised concerns among policymakers, prompting central banks like the Federal Reserve, the European Central Bank, the Bank of England, and others to cut interest rates.
While the U.S. economy outperforms, requiring higher interest rates to curb inflation, the sustainability of the interest rate gap is a concern for central banks. However, the risk of a downward spiral triggering inflation due to significant currency devaluation remains low.
Central banks face challenges in curbing borrowing costs driven by market fluctuations, especially if U.S. yields rise, consequently hindering economic growth.