US Elections and Geopolitical Risks: The "Key" to Monetary and Fiscal Policy

• What are the fears if the Republican elector is elected?

• How do the "open" wounds of the Middle East affect inflation in the eurozone?

• What are the thoughts of the "brains" of the ECB, and how do they influence interest rates?

• How the Finance Minister and bankers gave a positive outlook for the future of loans.

Geopolitical risks associated with conflicts in the Middle East and the risks of further escalation of trade tariffs are the "keys" to developments in monetary policy, finance, and fiscal matters, as well as decisions by the European Central Bank regarding interest rates, depending on the outcome of the US elections.

Additionally, decisive factors for developments are expected to be the conflict in the Middle East, which impacts energy prices, and the upcoming elections that could influence international trade, global growth, and inflation.

The European Central Bank is sending its messages both to the markets and to its member central banks, emphasizing that the uncertainty created by geopolitical risks raises alarms and necessitates very cautious steps.

On the other hand, the European Commission is closely monitoring governments as they submit their medium-term fiscal plans to gather more data on fiscal prospects, which is a factor taken into account in analysis and decision-making.

Thus, geopolitical risks, the likelihood of negative developments in international trade, and what will happen with fiscal policy will influence all decisions in the near future.

In Cyprus, bankers conveyed a message to Finance Minister Makis Keravnos yesterday during their meeting, indicating that in the coming months, specifically the next six to eight months, a new reduction in interest rates is expected, clarifying that there is no delay in this reduction compared to the decisions of the European Central Bank.

According to information from Brief, the Minister asked bankers to support the new Interest Rate Subsidy Scheme for Housing Loans, which will begin to be implemented this month.

Soon, the Ministry will send letters of interest to banks to initiate the first step in implementing the Scheme. The new Scheme is the result of coordination and cooperation between banks and the state and is expected to provide relief for young couples and young people in general who hope to acquire their own home.

Regarding what is expected in the coming weeks and beyond that also affects Cyprus, Brief spoke with market analysts and is monitoring what foreign analysts are reporting. The most significant events concern:

First, the presidential elections and the outcome of November 5, as major changes in global trade are anticipated if the Republican candidate and former president Donald Trump prevails.

Second, the electoral race between Democratic candidate and Vice President Kamala Harris and Donald Trump, which is expected to be close according to polls, as Trump's economic agenda has long raised alarms in Brussels and Frankfurt.

Third, Trump's decision to proceed with or not impose a horizontal tariff of 60% on Chinese products and up to 20% on products from other countries, including European ones, to fund tax cuts in the US.

Fourth, the painful repercussions on global trade that could cause a major shock, possibly the largest since the wave of extreme protectionism in the 1930s.

Fifth, the negative impact on the European economy if Trump were to implement his proposals, especially during a time of consecutive crises, the latest being inflation.

European Central Bank President Christine Lagarde recently stated that "trade is the main driver of economic activity. Any kind of restrictions, uncertainty, or barriers to trade is significant for an open economy like the European one, which relies on both domestic and international trade."

She indicated, during the annual meeting of the IMF and World Bank, that "the US should respect its commitments and continue to support open trade rather than impose protective measures."

In the same vein, the International Monetary Fund warned in its latest report on the prospects of the global economy that an escalation of restrictions on international trade would lead to significant risks. Some of these relate to the ongoing wars, primarily in the Middle East.

Beyond the downward impact on GDP that horizontal tariff increases would have, they would halt the trend of decreasing inflation in the US, which was running at an annual rate of 2.4% in September, and would consequently force the country's central bank (Fed) to maintain very high interest rates for an extended period or to raise them, as warned by Tim Adams, CEO of the Institute of International Finance.

Some analysts argue that it is uncertain whether Trump would implement his tariff announcement if elected, as Europe is prepared to respond with its own countermeasures. They point out that Trump announced tariffs on European products during his presidency but ultimately did not proceed with their implementation when then-President of the European Commission Jean-Claude Juncker openly threatened to impose tariffs on American products.

In contrast to Trump, Kamala Harris is expected to continue the same policy as Biden in international trade, maintaining the tariffs imposed on a range of Chinese products that Washington deems subsidized, without proceeding to impose tariffs on European products.

For its part, the European Central Bank is preparing for unconventional measures, such as targeted long-term refinancing operations and quantitative easing.

It should be noted that the last review of the monetary policy strategy was conducted in 2021, during a period of strong deflationary pressures related to digitalization and globalization. Since then, the landscape has changed with a new geopolitical framework and the return of inflationary shocks.

The critical issues revolve around "how the new environment could affect inflation and our new policy," which will be discussed by the ECB's Governing Council in the new year, with conclusions expected in the second half of 2025.