ECB Warns US Tariffs Could Cut Euro Zone Growth by 1%

A recent study by the ECB, BIS, and ESM introduces an innovative method for predicting inflation using natural language processing (NLP) to analyze central bank communications, revealing that these texts contain valuable predictive signals. The research employs Word2Vec, allowing for real-time updates and avoiding look-ahead bias, which enhances forecasting accuracy during economic uncertainty. Concurrently, European financial markets are reacting to escalating trade tensions due to U.S. tariffs, with short-dated euro area yields dropping to a two-and-a-half-year low as investors speculate on potential ECB rate cuts. ECB policymaker Yannis Stournaras cautioned that these tariffs could lead to a significant demand shock in the euro area, potentially lowering economic growth by 0.5 to 1 percentage points. The broader implications of U.S. trade policies are causing increased global policy uncertainty, raising concerns about inflation falling below targets. As the situation evolves, the ECB's response will be closely monitored for its impact on economic stability in the eurozone.