As a result of President Trump’s recent announcement to further increase the punitive tariffs on Chinese goods, the solution to the US-Chinese trade dispute has moved even further into the distance after having seemingly been so close to a settlement. The next few weeks could also be overshadowed by an escalating customs dispute between the USA and the European Union. This casts fresh doubts over the anticipated acceleration in global economic activity.
A few months earlier, many central banks had already reacted to the weakening growth prospects and increasing uncertainty by deferring their tighter monetary measures until further notice. The European Central Bank, for example, has called off the interest rate increase it had announced for the autumn and has now gone on hold. This also corresponds with the approach currently taken by the US Federal Reserve which has announced the end of its interest rate hikes as well as the cessation of measures to trim down its balance sheet.
The hope for normalization of monetary policy has therefore been dashed for the time being. The environment of low interest rates and the risks associated with this still exist. The response on financial markets has not only been negative, with the low interest rates acting like a sedative and making the current geopolitical dangers appear less bad. However, this could prove fateful. At all events, the scope for a monetary response on the part of the central banks would be only very limited if, for example, there was an unexpected slump in growth.