The European Central Bank (ECB) policymaker Gabriel Makhlouf remarks that uncertainty is currently impacting investment. Business and consumer sentiment appear to be cooling, which is reflected in the soft data. Global economic integration is at a standstill or possibly reversing, with rapid changes witnessed over recent weeks.

Even if a trade war is short-lived, the uncertainty effects could last for an extended period. Monetary policy must evolve to address the new supply shocks resulting from geoeconomic fragmentation. The persistent fragmentation-induced shocks require careful adjustment in monetary policies due to their influence on prices.

Concerns About Inflation

There are growing concerns about inflation becoming unanchored, necessitating a determined response. Interest rates remain the primary policy tool, but in scenarios constrained by the lower bound, alternatives such as targeted lending and balance sheet operations are considered useful.

Makhlouf calls for a cautious approach towards interest rate adjustments, suggesting a pause to better understand recent trade developments. Currently, the market predicts a 45 basis point easing by year-end, down from the previous 56 basis points anticipated before the US-China developments.

Makhlouf’s comments highlight the mounting weight of external pressures—trade tensions, particularly—on both confidence and forward-looking economic decisions. When businesses hesitate, investment slows, and that deceleration tends to appear first in what economists term “soft data”: surveys, sentiment indices, and similar indicators that lean heavily on expectations rather than actual output. What we are seeing is precisely that—less optimism, declining momentum. Hard figures will likely follow with a lag.

He identifies a particular concern: that the world’s economies are no longer entangling at the rate they were. If anything, we’ve seen clear examples of a drawdown in cross-border supply reliance. From sourcing materials to shifting production hubs closer to end markets, the rearrangement presents new cost structures. These carry with them a fresh sort of inflation pressure—not demand-led pricing but persistent disruptions and inefficiencies as firms rework what took decades to establish.

Structural Inflation Pressures

That type of pressure behaves differently compared to typical cyclical inflation. It doesn’t fade quickly and can’t be leaned against in the regular fashion. If policy tightens too soon or not enough, there’s the risk of either exacerbating the strain on businesses or letting expectations drift. The delicate balance Makhlouf suggests—waiting and watching—isn’t hesitance for its own sake. It’s the recognition that these shocks aren’t transitory ripples. They’re structural changes that need structural responses.

What is evident from the prevailing rate projections is that markets are tempering their expectations for upcoming cuts. In late spring, predictions stood firmer. But with headlines around major economies reconsidering trade pacts, investors have recalibrated. That downward revision, from 56 to 45 basis points by year-end, is telling. It suggests reduced confidence in the extent of easing now deemed appropriate.

For us, this shift means rethinking the pace and positioning of rate-sensitive assets. Forward contracts that once offered a straightforward play on dovishness have become more susceptible to newsflow. Volatility risk is no longer priced exclusively around central bank meetings. Comments such as Makhlouf’s can be just as market-moving.

More importantly, the reminder he provides on alternative tools should not be lost. When policy rates brush against effective lower bounds, it’s these secondary measures—direct lending schemes, asset purchases, and so on—that become relevant again. We should be prepared to reconsider scenarios where these instruments aren’t just revived, but expected.

Market participants must also acknowledge that what’s happened between major trading blocs in recent weeks has tilted the expected policy path—not completely off course, but onto terrain that wasn’t mapped in early-year forecasts. We’ve seen sensitivities increase—rate futures, currency crosses, and volatility surfaces all reacting more to policy narrative than pure data. Anchoring expectations now matters just as much as actual outcomes. That’s the logic behind a policy pause and the emphasis on being “data informed,” not “data reactive.”

If expectations de-anchor, inflation dynamics could alter materially over the intermediate term. Break-even rates, once stable, might start drifting higher if the veracity of the inflation target is questioned. That’s when rate conviction returns—with urgency. For now, though, Makhlouf points us toward a phase without bold moves—one in which we measure before cutting.

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