Sintra 2025 central bankers focus on inflation targets and trade risks
- Adam German
- Jul 4
- 4 min read
At the European Central Bank’s annual policy forum in Sintra, monetary authorities from major economies offered cautious assessments of inflation, rate trajectories, and the risks of global economic fragmentation.
Japan’s Kazuo Ueda outlined the complex forces behind the country’s price levels, while U.S. Fed Chair Jerome Powell emphasized patience on rate cuts. South Korea’s Rhee Chang-yong called attention to the asymmetric risks faced by trade-dependent economies.
Across all panelists, data dependence and geopolitical uncertainty were recurring themes.
Bank of Japan Governor Kazuo Ueda: “Inflation structure still fragile”
Japan continues to face a divergence between headline and core inflation:
Headline CPI: Above 2% for nearly three years.
Underlying inflation: Still “somewhat below 2%,” Ueda said.
Ueda identified three key inflation drivers:
Wage-price dynamics: Slowly strengthening, aided by domestic demand.
Anticipated tariff effects: Not yet visible in the data but expected to weigh on growth and prices.
Domestic food price shocks: These account for around half of headline inflation, expected to subside by year-end.
Monetary policy outlook:
The current policy rate is likely below the neutral rate.
Any rate hikes will depend on the relative strength of the inflation components.
The BoJ continues to conduct scenario-based simulations but does not publish them
Global fragmentation and trade:
Ueda raised concerns about how U.S. tariffs and trade fragmentation could impact Asia, even excluding China.
Expressed hope that regional resilience, particularly from India’s growth, would cushion shocks.
Reserve currency dynamics:
Stressed that the dollar remains dominant, but Europe and China could eventually improve their currency infrastructure to challenge that status.
Looking ahead:
Ueda’s goal by 2028 is for both headline and core inflation to converge to 2%.
His advice for a successor: “Take great care in reducing the balance sheet.”
Fed Chair Jerome Powell: “Solid progress, but more work to do”
Powell described the U.S. economy as being in a “pretty good position”:
Inflation: Headline at 2.3%, core at 2.7%.
Unemployment: 4.2%, signaling a strong labor market.
Rate cut timing:
Tariffs have pushed inflation forecasts higher, causing the Fed to pause further cuts.
A majority of FOMC members expect rate reductions later in 2025, depending on incoming data.
“Meeting by meeting” approach emphasized—no July cut commitment.
Neutral rate and policy stance:
Powell noted that policy is currently restrictive, but not so tight as to impair growth.
He views the neutral rate as a helpful concept, but stressed real-world indicators should guide decisions.
Scenario planning:
The Fed already uses 6–7 internal scenarios per meeting.
Public communication of scenarios is under review as part of the framework review.
Digital currency and regulation:
Powell strongly supports a regulatory framework for stablecoins at both the federal and state level.
He warned that the lack of such a framework had become a vulnerability.
Bank of Korea Governor Rhee Chang-yong: “Tariffs deflationary for Korea, not inflationary”
Rhee provided a distinct perspective, saying that tariffs may reduce inflation in Korea, not increase it.
Inflation: Stabilized around 2%.
Growth: Just 0.8%, well below potential.
Reasons tariffs are deflationary:
Korea is unlikely to retaliate.
22% of imports come from China, where prices are falling.
Weak domestic demand limits inflation pressure.
Monetary policy:
BoK has cut rates by 100 bps since October, remaining in an easing cycle.
However, rising housing prices in metropolitan areas present financial stability risks.
Further easing will be data-dependent and cautious.
Trade and global fragmentation:
Warned that retaliatory tariffs could reduce GDP by 1% or more.
Highlighted South Korea’s export dependence and noted relocation from China began years ago.
Optimistic that sectors like semiconductors could benefit from global AI trends.
Currency and dollar liquidity:
Voiced confidence in Fed swap lines during global crises but stressed the need for self-insurance reserves in non-global crises.
Stablecoins:
Warned that non-bank issuance of stablecoins could undermine capital flow controls.
Korea is piloting tokenized deposits with commercial banks, but broader policy requires coordination with other agencies.
Bank of England Governor Andrew Bailey: “Rate path is downward, but watch the risks”
Bailey refrained from using the word “transitory,” but maintained that the UK’s recent inflation spike was not demand-driven.
Driven largely by regulated or administered prices.
Sees softening in labor markets and expects a gradual easing of policy ahead.
On trade and financial conditions:
Tariff actions remain unpredictable, with possible supply chain effects.
Stressed that traditional financial condition indicators are behaving differently, requiring more granular analysis.
Scenario use:
Introduced two public scenarios in May 2025; found them useful internally.
Warned that public communication of conditional projections is often misinterpreted.
On stablecoins:
Bailey emphasized that any form of digital money must pass the trust test - it must reliably hold nominal value.
“If it doesn’t, it shouldn’t be treated as money,” he said.
ECB President Christine Lagarde: “We’re navigating tormented waters - carefully”
Lagarde highlighted that eurozone inflation had reached the 2% target, but added that this does not mean ‘mission accomplished’.
The ECB will continue to be:
Data dependent
Meeting-by-meeting
Non-committal on a rate path
On global shocks and fragmentation:
Warned that geopolitical and economic fragmentation has already begun.
Emphasized Europe’s need to become more self-reliant after shocks including the war in Ukraine and energy supply disruptions.
Digital money:
Lagarde issued a strong warning against stablecoins, calling them a step toward the “privatization of money.”
“Money is a public good. Our job is to protect it,” she stated.
Scenario analysis:
ECB may expand its use of scenario-based forecasting, especially in cases of external shocks like war, tariffs, or pandemics.
Believes scenarios will help strengthen the reliability of ECB’s baseline projections.
On AI and central banking:
Raised concerns that AI could distort economic narratives, emphasizing the importance of empirical, fact-based policymaking.
