Former U.S. President Donald Trump’s decision to raise tariffs on Chinese imports to 54% — a move that combines a newly imposed 34% reciprocal tariff with a prior 20% levy — brings the trade relationship closer to the “worst case scenario” outlined during his campaign, according to analysts at ING. Tariffs on certain goods, including electric vehicles, are expected to climb even higher.
With this abrupt escalation, ING warns that the risk of a forceful retaliatory response from China has increased significantly. The move comes at a time when China is grappling with deflationary pressures and slowing growth, prompting speculation that the People’s Bank of China (PBOC) may soon deliver its first policy easing of the year.
ING now expects the PBOC to cut interest rates by 30 basis points and lower the reserve requirement ratio (RRR) by 100 basis points in 2025, with room for further action if needed. The central bank had previously signalled a readiness to ease policy when appropriate.
On the currency front, ING notes that the latest tariff shock will likely add downward pressure on the yuan (CNY) in the short term, as markets assess both the direct economic impact and rising expectations for monetary easing. However, the bank maintains that the PBOC is unlikely to pursue deliberate currency devaluation as a response to the trade measures.
Instead, ING believes the central bank will stay committed to maintaining a stable exchange rate, suggesting that the USDCNY will continue to exhibit low volatility. The bank’s base case remains a trading band of 7.00 to 7.40 for the remainder of the year.
This article was written by Eamonn Sheridan at www.forexlive.com.