The U.S. reciprocal tariffs will stymie economic growth and lift inflation, forcing the Federal Reserve to start lowering interest rates from the end of this year, while the European Central Bank could cut rates as soon as this month, Nomura said.
U.S. President Donald Trump imposed sweeping tariffs on dozens of countries on Wednesday, which intensified the threat of a global trade war and fuelled fears of a global economic slowdown, or even a recession.
The tariffs are “worse than feared”, said Nomura, lowering its U.S. GDP growth estimate to 0.6 per cent from 1.5 per cent, on a quarterly basis, and hiking to 4.7 per cent from 3.5 per cent its forecast for year-end core PCE, the Fed’s preferred inflation gauge.
As a result, the brokerage expects the Fed to lower rates in December, taking the policy rate to 4.125 per cent, followed by two more 25 bps cuts in the first quarter of 2026.
It had previously expected the central bank to hold at 4.25 per cent-4.5 per cent until the second quarter of 2026.
“Increased downside risks to growth and a more front-loaded inflation shock should allow cuts to resume sooner than we had expected”, Nomura economists led by David Seif said in a note on Thursday.
Traders, overall, have boosted bets of a full percentage point cut this year versus a 75 bps reduction seen before Trump’s tariff announcement.
“A MORE DOVISH ECB”
The ECB will be forced to act even quicker than the Fed, said Nomura, since Trump’s tariffs will effectively increased duties to 20 per cent for the European Union.
The brokerage, in a separate note on Thursday, forecast uncertain inflation for the region and lowered its growth forecast by 20 basis points.
As a result, Nomura now expects the ECB to cut rates in April and June – instead of just in June – resulting in a terminal rate of 2.00 per cent, from 2.25 per cent predicted previously.
Post the tariffs, traders see a roughly 70 per cent chance of a quarter-point rate cut this month. They see a depo rate of 1.75 per cent by the end of the year, implying three more cuts.
