An expected decline in interest rates could be stalled if the prospective tariffs of Donald Trump’s second White House administration bleed into markets and shore up inflation, UBS CEO Sergio Ermotti warned Tuesday.
“Something that I’ve been saying for a while, inflation is much more sticky than we have been saying,” he told CNBC’s Andrew Ross Sorkin at the World Economic Forum in Davos, Switzerland. “The [truth] of the matter is that we need to see also how tariffs will play a role in inflation.”
“Tariffs will probably not really help inflation to come down. And therefore I don’t see rates coming down as fast as people believe,” he said.
Markets have been on alert for the next trade steps of the newly inaugurated Trump, who has threatened to impose 25% tariffs on Mexico and Canada, while also floating a separate set of retaliatory trade measures against China in a bid to pressure Beijing to force ByteDance’s sale of TikTok.
Historical ally Europe is also on the look-out for potential U.S. protectionism in commerce, as Trump progresses his “America First” agenda.
Inflation has been cooling in most major global economies, after a period of heated price growth propelled by the Covid-19 pandemic and an energy crisis driven by the war in Ukraine. Europe, the U.K. and the U.S. all finally began their respective cutting cycles last year.
In Trump’s home territory, U.S. inflation edged higher in December, rising to 2.9% year-on-year from 2.7% in November. The latest minutes of the U.S. Federal Reserve December meeting pointed to an outlook of just two interest rate cuts in 2025, down from a previous estimate of four such trims during the September gathering, assuming quarter-point adjustments.
A high-interest rate environment often benefits the commercial banking sector — whose U.S. lenders could also stand to benefit from a competitive edge against European counterparts, if Trump materializes his pledge of a lighter touch on regulation.
“I don’t believe we’re going to see a lot of deregulation,” Ermotti said Tuesday. “Probably we won’t see more regulation, we won’t see overlapping new regulation that is in conflict with existing regulation.”
He added that he did not believe banks should be “massively deregulated,” but noted it is “very important that we don’t get new unnecessary regulation.”
Big fish in a small pond
UBS has encountered friction with regulators in its Swiss home base, after exiting the umbrage of a tumultuous government-backed marriage with embattled rival Credit Suisse in 2023. The bank has been contending with concerns that it has become a large fish in the vulnerable pond of the Swiss economy, which already battles a strong franc and plunging inflation.
“If you look at the numbers alone and compare UBS with the Swiss economy, it is too big,” former Swiss Finance Minister Ueli Maurer said Jan. 10 in an interview with Swiss newspaper Tages-Anzeiger, according to a Google translation. “Therefore, the risk must be reduced. This is primarily down to the shareholders, who elect the bodies and are liable with their capital. They must take responsibility, not the taxpayers in the end. Legislative measures must also be examined.”
Topping $1.7 trillion in 2023, UBS’ balance sheet is around double Switzerland’s anticipated economic output for last year — meaning its potential failure at any point would deprive the lender of local rivals to absorb it, pose risks of disruption to the Swiss economy and strand the Bern government with a hefty bill to foot in the event of nationalization.
Ermotti has previously 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 posted a sweeping beat in the third quarter, with net profit attributable to shareholders coming in at $1.43 billion, compared with a mean forecast of $667.5 million in a LSEG poll of analysts. The lender’s revenue for the period hit $12.33 billion, also above analyst expectations near $11.78 billion. The group is set to publish fourth-quarter results on Feb. 4.
