Klaas Knot, a member of the European Central Bank's (ECB) Governing Council, has expressed concern that the recent broad import tariffs imposed by U.S. President Donald Trump could lead to a prolonged period of stagflation—characterized by rising inflation and stagnant economic growth. Speaking at a conference at the Dutch central bank, Knot described the trade war as a negative supply shock, predicting that its effects will eventually be more inflationary than deflationary.

Knot also highlighted increased government spending by Germany and the urgent need for investment in European defense as contributing factors to inflationary pressures. He emphasized that the primary responsibility of the ECB is to determine when tariffs begin to significantly affect economic activity and business decisions. However, he noted that the ECB’s upcoming policy meeting would be too early to update economic projections.

Despite financial market disruptions following the tariff announcements, central banks have not yet intervened, as market function has remained intact. Knot explained that hedge funds had anticipated these developments and reduced their leverage accordingly, allowing them to manage margin calls effectively, unlike in previous volatile episodes.

The ECB remains vigilant in monitoring the situation and stands ready to preserve financial stability in case of further market turmoil. French Central Bank chief Francois Villeroy de Galhau stated that the Bank of France and the ECB are fully mobilized to ensure the eurozone economy is well financed and to maintain financial stability.