Interest rates won’t fall as fast as expected if tariffs stoke inflation, UBS CEO says

An expected drop in interest rates could be set in motion if the prospective tariffs of Donald Trump’s second White House administration hit markets and cool inflation, UBS CEO Sergio Ermotti warned on Tuesday.

“Something I’ve said for a while, inflation is a lot stickier than we’ve been saying,” he told CNBC’s Andrew Ross Sorkin at the World Economic Forum in Davos, Switzerland. “U [truth] of the matter is that we also need to see how tariffs play a role in inflation.”

“Tariffs probably don’t really help inflation come down. And because of that, I don’t see rates going down as much as people believe,” he said.

Markets have been on alert for the next trade steps of the newly inaugurated Trump, who has threatened impose tariffs of 25% on Mexico and Canadawhile they are also floating a separate set of retaliatory trade measures against China in an attempt to pressure Beijing to force the sale of ByteDance’s TikTok.

Europe’s historic ally is also on the lookout for potential US trade protectionism as Trump pushes ahead with his “America First” agenda.

Inflation has eased in most major global economies, following a period of heated price growth fueled by the Covid-19 pandemic and an energy crisis driven by the war in Ukraine. Europe, the United Kingdom and the United States finally started their respective cutting cycles last year.

In Trump’s home territory, US inflation finished higher in December, which increased to 2.9% annually from 2.7% in November. The last minutes of the December meeting of the Federal Reserve of the United States indicated a prospect of only two interest rate cuts in 2025from a previous estimate of four such trims during the September meeting, assuming quarter-point adjustments.

A high interest rate environment often benefits the commercial banking sector – which American lenders could also enjoy a competitive advantage against European counterparts, if Trump materializes his promise of a lighter touch on regulation.

“I don’t think we’re going to see a lot of deregulation,” Ermotti said Tuesday. “We’re probably not going to see more regulation, we’re not going to see new overlapping regulation that conflicts with existing regulation.”

He added that he did not believe that banks should be “massively deregulated”, but noted that it was “very important that we do not have unnecessary new regulation”.

“If you look at the numbers alone and compare UBS with the Swiss economy, it’s too big,” former Swiss finance minister Ueli Maurer said on January 10. in an interview with the Swiss newspaper Tages-Anzeigeraccording to a google translation. “Therefore, the risk must be reduced. This is mainly for the shareholders, who elect the bodies and are responsible with their capital. They must take responsibility, not the taxpayers at the end. The legislative measures must also be examined” .

More than $1.7 trillion in 2023the balance sheet of UBS is around double that of Switzerland anticipated economic output for the past year – which means that its potential failure at any point will deprive the lender of local rivals to absorb it, pose risks of disruption to the Swiss economy and hit the Bern government with a heavy bill in the event of nationalization.

Ermotti has already defended that his bank is not “too big to fail“- while the government last April recommended that UBS and three other systematically relevant lenders must face tougher capital requirements to safeguard the national economy.

Since then, the bank has published a sweeping beat in the third quarter, with net profit attributable to shareholders coming in at $1.43 billion, compared with an average forecast of $667.5 million in an LSEG poll of analysts. The lender’s revenue for the period reached $12.33 billion, well above analysts’ expectations of $11.78 billion. The group will publish fourth quarter results on February 4.