The global economy’s trajectory toward lower interest rates might hit a significant roadblock, as UBS CEO Sergio Ermotti highlights the potential inflationary impact of Donald Trump’s proposed tariffs.
Speaking at the World Economic Forum in Davos, Switzerland, Ermotti issued a stark warning about the enduring nature of inflation and its implications for monetary policy.
Sticky Inflation and Tariffs: A Volatile Mix
“Something that I’ve been saying for a while, inflation is much more sticky than we have been saying,” Ermotti told CNBC’s Andrew Ross Sorkin. He emphasized that tariffs could exacerbate inflationary pressures rather than alleviate them.
As markets eagerly anticipate further interest rate cuts, Ermotti’s remarks suggest caution. “Tariffs will probably not really help inflation to come down.
And therefore, I don’t see rates coming down as fast as people believe,” he said. This viewpoint underscores the delicate balance policymakers must maintain as they navigate the interplay between trade policies and monetary tools.
Trump’s Tariff Proposals Raise Concerns
Markets remain on edge over Trump’s tariff agenda. The former president, now in his second term, has floated a 25% tariff on Mexico and Canada, while signaling potential retaliatory measures against China to pressure the sale of ByteDance’s TikTok.
These moves align with Trump’s “America First” agenda, but they could disrupt global trade flows and stoke inflationary pressures.
The European Union, a historical ally, is also monitoring the situation. The bloc has expressed concerns about potential U.S. protectionism, which could further strain transatlantic trade relations.
Such measures may hinder global efforts to cool inflation, which has already shown signs of moderation in major economies like the U.S., U.K., and Europe.
Inflation Trends and the Federal Reserve’s Outlook
After a period of heightened inflation driven by the COVID-19 pandemic and the energy crisis linked to the Ukraine war, inflationary pressures have begun to ease.
However, in the U.S., December saw inflation edge up to 2.9% year-on-year, slightly higher than November’s 2.7%. This uptick has tempered expectations for aggressive interest rate cuts by the Federal Reserve.
Minutes from the Fed’s December meeting reveal a cautious outlook, with only two rate cuts projected in 2025, down from four in the September estimate. This recalibration reflects the uncertainty surrounding inflation dynamics and the potential impact of Trump’s trade policies.
High Rates: A Boon for Banks?
While high-interest rates pose challenges for borrowers, they often benefit the commercial banking sector. U.S. banks could gain a competitive edge over their European counterparts if Trump’s administration delivers on promises of lighter regulation.
However, Ermotti remains skeptical about significant deregulation, stating, “I don’t believe we’re going to see a lot of deregulation. Probably we won’t see more regulation, but we won’t see overlapping new regulation that is in conflict with existing regulation.”
He further emphasized the importance of avoiding unnecessary regulatory burdens, while maintaining that banks should not be “massively deregulated.” This balanced approach could help mitigate risks while fostering a stable financial environment.
UBS: A Giant in a Small Economy
UBS’ position as a dominant player in the Swiss financial landscape has drawn scrutiny. Following its government-backed acquisition of Credit Suisse in 2023, UBS has faced concerns about its outsized influence on the Swiss economy.
Former Swiss Finance Minister Ueli Maurer recently described the bank as “too big” relative to the nation’s economic output.
With a balance sheet exceeding $1.7 trillion in 2023—double Switzerland’s projected GDP—UBS poses systemic risks. A potential failure could disrupt the Swiss economy and leave the government with a hefty bill. To address these risks, Swiss regulators have recommended tougher capital requirements for UBS and other systemically important banks.
Despite these challenges, UBS has demonstrated resilience. The bank posted a robust net profit of $1.43 billion in the third quarter of 2024, significantly beating analyst expectations. Revenue also exceeded forecasts, reaching $12.33 billion.
As UBS prepares to release its fourth-quarter results, all eyes will be on its ability to navigate regulatory pressures and maintain its strong performance.
Navigating an Uncertain Future
As the global economy grapples with the interplay of trade policies, inflation, and monetary policy, Ermotti’s warnings highlight the complexity of the road ahead. Trump’s tariff proposals could stall progress on interest rate cuts, prolonging a high-rate environment that has both winners and losers.
For UBS, the challenges extend beyond macroeconomic trends. The bank must address concerns about its systemic importance while continuing to deliver strong financial results. In this context, Ermotti’s cautious optimism and call for balanced regulation offer a blueprint for navigating an uncertain future.
The coming months will reveal whether policymakers and market participants can strike the right balance to foster economic stability in the face of evolving challenges.
