24 April 2025: Public sector borrowing creates yet another black hole

Rachel Reeves, in Washington for the IMF Spring Meeting and to “negotiate” a trade deal with the Trump Administration, was told yesterday what lengths she will have to go to to see a reduction in the 25% tariffs that have been imposed on the export of British manufactured vehicles to the U.S. and 10% tariffs on all other goods and raw materials.

In a meeting with Scott Bessent, Trump’s Treasury Secretary, she was told that the UK must reciprocate by reducing the tariffs charged on UK imports of American-built vehicles. She was amenable to this, but Bessent’s other requirement will cause considerable anger at home.

Food standards, particularly in the livestock and meat industry, are “different” in the U.S. and Bessent has suggested that the UK relax some of our regulations and import more U.S. beef, lamb and chicken.

Speaking before the meeting, Reeves insisted that she does not believe that a free trade deal is so vital to the UK that it will accept any terms that America offers. She told reporters that she is prepared to “walk away” if she cannot agree on terms.

British farmers are already angry about the changes that Reeves introduced regarding inheritance tax on family-owned farms last autumn, and any change to food standards that allow more American-reared meat into the country would cause their protests to rise to a whole new level.

Meanwhile, representatives of the British fishing industry accused the Prime Minister of betrayal yesterday over reports that the government is planning to grant European boats greater access to UK waters. Fishing in and around UK waters has been contentious since the vote to leave the EU almost ten years ago.

The UK fishing fleet believes that its livelihoods are being sacrificed for the UK to move closer to the EU as a prelude to a new deal being negotiated.

Fishing organisations have described the potential move as a "craven capitulation" to EU demands.

Andrew Bailey has signalled that a trade deal with the US will not save the UK from a growth slump, as he opened the door for more interest rate cuts to boost the economy.

The Governor of the Bank of England warned that higher tariffs will weigh on UK growth, even though the country is less exposed than major exporters such as China and Germany.

“We do have to take very seriously the risk to growth,” Mr Bailey said at the Institute of International Finance in Washington. “Fragmenting the world economy will be bad for growth.”

Mr Bailey’s comments are a clear sign that policymakers are more concerned about the risk to growth from tariffs than higher inflation.

This suggests they will be more likely to respond to Mr Trump’s tariffs by reducing interest rates further from their current level of 4.5%. The Bank is also likely to cut its predictions for growth next month when it releases its latest forecasts for the economy.

The markets settled back into a less volatile state yesterday as they continue to digest the implications of Trump’s ever-changing trade policies. Sterling fell to a low of 1.3261 and closed at 1.3267.

President Trump moved to defuse the growing anger that has been directed towards him for his continual haranguing of Fed Chairman Jerome Powell, which is seen as amounting to blackmailing him to cut interest rates to save his job.

Markets rallied after the President eased concerns over tariffs and the Fed. U.S. stocks rose yesterday as a worldwide rally came back around to Wall Street after President Trump appeared to back off his criticism of the Federal Reserve and his tough talk in his trade war.

The S&P 500 climbed 1.4% and added to its big gains from Tuesday that more than made up for a steep loss on Monday. The Dow Jones Industrial Average was up 333 points, or 0.9%, and the Nasdaq composite rose 2.2%.

Speaking about the likelihood of deals being reached over tariffs with America’s largest trading partners, although he studiously avoided mentioning China, Trump told reporters that he has no intention of removing Jerome Powell from his job, possibly realizing the furore that would cause in Congress and financial markets, even if it were possible to do so.

Trump’s abrupt shift in rhetoric on Tuesday towards Federal Reserve Chair Powell reflected the private lobbying of some of his senior advisers, who had urged the president to back off his incendiary attacks on the Central Bank. Officials in the administration fear that his attacks will be construed as a threat to Fed independence.

Treasury Secretary Scott Bessent on Wednesday tried to soften the tone around President Donald Trump’s sweeping import tariffs as signs emerged that the president is backing off the most contentious levies.

Markets rallied early Wednesday after Trump said Tuesday he had “no intention” of firing Federal Reserve Chairman Jerome Powell, and Bessent said in a private meeting that there would be “de-escalation” in the president’s ongoing trade war with China.

Even firing Powell won’t necessarily get Trump the rate cuts he wants, according to several economists. “In all likelihood, however, firing Powell would just be the first step in dismantling the Fed’s independence.

If Trump is set on lowering interest rates then he will have to fire the other six Fed Board Members too, which would trigger a more severe market backlash, with the dollar falling and rates at the long end of the yield curve rising,” said Paul Ashworth, chief North America economist at Capital Economics, in a recent interview.

Powell is chair of both the Fed board of Governors and the Federal Open Market Committee, which sets interest rate policy. Ashworth pointed out that, while FOMC members usually choose to make the president-appointed board of governors chair lead them, they can ignore Trump and select someone else as head of the rate-setting committee. And JPMorgan’s chief U.S. economist, Michael Feroli, said in a note Monday that “most of the power of the leadership stems from the historical deference” rather than the actual mechanics of the job.

The dollar rallied yesterday as Trump visibly moved to defuse tensions that had begun to grow again on Monday. It climbed to a high of 99.90, still facing strong selling interest at the 100 level, and closed at 99.69.

Klaas Knot, the Governor of the Dutch Central Bank and a member of the ECB’s Governing Council, told reporters yesterday that he believes that rates should remain at their current “neutral state” until the current turmoil in financial markets abates.

Inflation in the eurozone may fall faster than anticipated in the near term, dragged down by a stronger euro, cheaper fuel and a hit from the United States' tariffs announcement, according to Knot.

However, he cautioned that the medium-term inflation outlook was more uncertain, as trade snags may push up prices and more fiscal spending in Europe may support employment.

"The strong euro, together with falling energy prices, suggests that the near-term impact might not be so inflationary after all," Knot told an event at the Peterson Institute for International Economics. "For the medium term, however, there still is the risk that disruptions in global supply chains will put upward pressure on prices."

He backed keeping the ECB's policy rate at a level that is "neither accommodative nor restrictive", which the ECB estimates to be in a range between 1.75% and 2.25%. It is currently at 2.25%.

Meanwhile, ECB President Christine Lagarde lauded the job that Jerome Powell is doing at the Federal Reserve, in particular maintaining the Fed’s monetary policy position in the face of intense pressure from President Trump.

She told reporters at an IMF-sponsored event in Washington, “I have enormous respect for Jay Powell, he is serving the American people, providing economic and financial stability.

The European Central Bank’s main gauge of future pay growth continued to indicate a sharp slowdown in 2025, underpinning expectations for a further retreat in inflation that may allow more interest-rate cuts.

The ECB’s wage tracker, published Wednesday, predicts salaries will rise by an annual 1.6% in the fourth quarter. That’s just above the 1.5% projection seen in March, and a far cry from the 5.3% peak recorded last year.

Prices in the services sector, where salaries play a large role, are still rising rapidly. But those gains have also levelled off in recent months. Lagarde has said, “Wages are gradually moderating.”

Backing this, an ECB survey published Tuesday showed greater confidence among companies that pay growth will retreat further, reaching 3% and 2.5% in 2025 and 2026, down from 4.3% in 2024. The figure for 2025 was 0.5% lower than in earlier survey rounds, the ECB said.

The latest negotiated pay deals support this view. In Germany, unions representing about 2.5 million public-sector workers agreed to a wage increase of 3% this year and 2.8% in 2026, calling it a “difficult agreement in difficult times.” That’s a level broadly seen in line with price stability.

Investors predict further ECB rate cuts, partly due to uncertainty over global trade and a strengthening euro. The worsening outlook may also make it more difficult for unions to push through wage deals that would worry the central bank.

The euro moderated its recent rise yesterday, falling to a low of 1.1306. It then saw some significant buying, which drove it to a high of 1.1430, before Trump’s rhetoric saw it fall back to close at 1.1315

Have a great day!