28 March 2025: The Chancellor rules out retaliatory tariffs…..for now

The imposition of 25% tariffs on importing vehicles into the United States will likely affect UK manufacturers significantly. Luxury marques like Bentley, Rolls-Royce and Land Rover Jaguar see a significant portion of sales in the U.S., while domestic manufacturers are only represented in this sector by Cadillac, UK firms are expected to make representations to the Prime Minister to speed up negotiations over the agreement of a wide-ranging trade agreement with the Trump Administration.

Trump and his “partner in crime”, Elon Musk, won’t consider an agreement with the UK without some quid pro quo. According to reports yesterday, Britain is working intensely with Washington to secure an exemption from U.S. auto tariffs and could review subsidies enjoyed by Elon Musk's Tesla to better support its industry, as Chancellor Rachel Reeves said on Thursday.

Reeves said Britain should be given a carve-out from any global tariffs because the two countries report trade surpluses with each other due to measurement differences after U.S. President Donald Trump unveiled his latest move.

“A million British people work for American firms. A million Americans work for British firms,” Ms Reeves told Times Radio.

“Our two economies are so closely intertwined.”

“I believe, and we make this case to the United States, that free trade, fair trade is good for both of our countries. But let’s see where we get to in the next few days.”

However, the Government will be closely scrutinized for any concessions it makes to the Trump administration, including possibly watering down a digital services tax, to favour US tech giants.

Trump is all about using the U.S. economy's might to force nations with similar trading relations to the UK into bending to his will.

Rachel Reeves is facing a constant stream of criticisms over her performance since moving into 11 Downing Street. She is trying to be proactive, but in doing that, she has dealt poorly with events that have overtaken her.

While having a single-minded approach to promoting growth may be commendable, she also needs to deal with issues in the real world and realize that she has to be pragmatic and look at events through a less theoretical and more practical lens.

The Cabinet has yet to grasp the difference between being in Opposition and leading the country. In Opposition, Reeves and her colleagues were able to make policy suggestions without the need to stress test them, while in government, they are having to learn quickly that the entire economy is interconnected.

The Prime Minister said that the UK would continue intense discussions on closer trade ties to ease tariffs but stressed that all options remain on the table. It is doubtful that the UK has enough “muscle” for any threatened reprisals to make Trump “blink”.

The pound saw a positive reaction yesterday despite the possible consequences of the new tariffs for the UK industry. After a series of corrections over the past five sessions, it rallied to a high of 1.2992 but fell back to close at 1.2943.

In the wake of President Trump nominating “tariff” as his new favourite word, the Federal Reserve has also found itself delving through its lexicon and has replaced “transitory” with “uncertainty.”

It is hard to find a transcript of any speech made by a member of the FOMC which doesn’t include uncertainty as the reason for rates to remain on hold.

Yesterday, the President of the New York Fed, John Williams, spoke of the uncertainty that is facing U.S. households at the moment, which is seemingly placing the entire country “on hold”, anxious about making a wrong decision.

The Fed subscribes to that cautious approach as it tries to ignore the “chatter” that is happening about the possibility of a recession happening later in the year, although the Fed's economists see little more than a far-from-significant downturn.

Williams continued that the "current modestly restrictive stance of monetary policy is entirely appropriate", given the strong labour market and inflation still above the 2% target.

Williams said the Fed would need to resume cutting rates to reach a neutral level, but currently, the downside risk to growth and the upside risk to inflation were both high. He acknowledged the uncertainties that lay ahead but said monetary policy was in the right place.

His colleague on the FOMC, Fed Governor Adriana Kugler, agreed. Progress on bringing inflation back to the central bank's 2% target has slowed since last summer, and the uptick in goods inflation seen in the latest data is "unhelpful."

The Fed is doing a good job of distancing itself from the politics of the situation, but sorting the “wheat from the chaff” is becoming increasingly difficult.

The imposition of 25% tariffs on the import of foreign manufactured vehicles will add another inflationary strand to the economy, causing the Fed likely to again leave rates unchanged at its next meeting.

One of Jerome Powell’s staunchest critics, Elizabeth Warren, told reporters yesterday that she believes that Trump will fire the Fed Chairman if he continues to ignore calls for the Fed to loosen monetary policy.

Trump finds the entire idea of Fed independence hard to swallow. As Chief Executive of America Inc., he cannot understand how an entire department of his business is out of his control.

In an interview with Bloomberg Television, Warren, who represents Massachusetts in the Senate, said, “Nobody is safe, not even the chairman of the Federal Reserve,” and warned that Trump’s interpretation of executive power means “all the power belongs to the king.”

The dollar saw a correction yesterday following its rally over the past few sessions. It corrected to a low of 104.08 and closed at 104.26.

European Central Bank Vice President Luis de Guindos said on Thursday that they are optimistic concerning inflation and that they believe they will converge towards the inflation target on a stable basis in coming quarters.

De Guindos believes that the main effect of tariffs will be on growth rather than inflation since any disruption in trade will see the economy falter further. He does not believe that retaliation is necessarily the answer. He would like to see more dialogue, although Brussels does need to respond positively and not shirk its responsibilities.

The Eurozone’s growth has been stagnating just above zero for the past two years, and there is little sign of any meaningful recovery, even if the risk of a recession seems to have declined.

"We believe that it will have a short-lived impact on inflation, but for growth, a trade war will be extremely detrimental," de Guindos told a financial conference.

In its latest report, Dutch bank ING highlights slight growth in lending across the eurozone, signalling modest economic progress as household and business lending figures inch upward.

February 2025 saw a small rise in eurozone lending, with household lending increasing from 1.3% to 1.5% and business lending edging up from 2% to 2.2%.

These figures, while modest compared to the robust lending growth of 2017-2019, are still encouraging.

ING credits these gains to the European Central Bank's policies, which are slowly enhancing the monetary environment.

However, it warns that while lending rates are on the rise, they still reflect a cautious approach that hasn’t fully spurred economic momentum. Until lending growth picks up speed, private investment may only see gradual increases.

Meanwhile, discussions of major public investments, especially in defence and German infrastructure, suggest a potential positive shift for future fiscal support, potentially reducing the economy’s reliance on monetary policy alone.

The eurozone's economic future may not rely solely on monetary policy. Substantial public investment plans, if implemented, could boost infrastructure, reduce reliance on monetary measures, and ultimately quicken growth.

As governments contemplate increased spending, these discussions could redefine the eurozone's economic landscape over the medium term.

There is an air of positivity pervading the region as its largest economy appears to be emerging from its difficulties of the past few years.

History may well show that in the post-Merkel period, Germany lacked the positive driving force to effect the changes that the global situation, particularly the emergence of China as a global force, and the war in Ukraine demanded.

The euro appears to have entered into a narrower, yet more positive phase. Yesterday, it rallied to a high of 1.0821 and closed at 1.0802.

Have a great day!