25 April 2025: Starmer faces a stark choice: fix Brexit or agree a trade deal with the U.S

Bank of England Governor Andrew Bailey told CNBC on Thursday that the Bank is focused on the possible "growth shock" from tariffs imposed by the administration of United States President Donald Trump, but noted he doesn't think the United Kingdom is close to a recession at the moment.

"We're certainly quite focused on the growth shock," Bailey noted, stressing the tariffs could negatively impact UK growth. Asked about the Bank of England's next monetary policy decision, Bailey stressed that the bank will consider "arguments on both sides" about the negative impact of US duties on economic growth and the "upside effect" of weak supply on inflation.

Bailey went on to say that, seeing as the United Kingdom is an "open economy," its relations with the United States are not the only thing that matters, but also the US relations with the rest of the world. “It's the relationship between the US, the UK, and the rest of the world that matters here.

So, when we do our modelling, we also have to take into consideration the effects on growth in the rest of the world," Bailey said. "We do have to take very seriously the risk to growth, in that sense," he added, noting that fragmenting the world economy will be bad for growth.

The Prime Minister faces competing pressures pulling at his Government. On one side, the UK’s relationship with the EU, and the negotiations that are quietly and in private reaching a climax over how to resolve the problems caused by Brexit.

On the other side, the much louder negotiations taking place in public between the UK and Donald Trump, to limit the fallout from his trade war with the world.

Brexit has already depressed economic growth, while according to the latest forecasts, Trump’s tariffs will slash it further. Fixing one problem probably blocks a solution to the other, and within each negotiation are conflicting interests that pose political risks to Starmer’s struggling Labour government.

It is believed that an agreement with Brussels to ease UK trade with the EU is close. One sticking point will be Europe’s demand for a youth mobility scheme, to give young people some of the lost benefits of free movement and the Erasmus university exchange scheme, which no longer extends to the UK.

Parties like the SNP and the Liberal Democrats would love to see a youth mobility scheme, and have been calling for one since Keir Starmer was elected, they have been recently today by dozens of Labour MPs and peers, including five Scottish Labour MPs, who have signed a public letter calling on the Government to back a youth mobility scheme.

EU Commission President Ursula von der Leyen met with Starmer in London yesterday. She told reporters that she was keen to discuss immigration with the Prime Minister, saying that we have shared objectives and both nations need to be able to have the final decision on who is coming to our nations, and under what circumstances.

The pound languished near the bottom of its day’s range yesterday but rallied to end the day on a high, closing at 1.3346.

Fed Governor Christopher Waller told Bloomberg on Thursday that tariffs are a part of most economic debates and noted that the general tone suggests that many companies are frozen by the uncertainty. He is concerned that that uncertainty will manifest itself in layoffs, and this will be the element of the economy that leads the Central Bank to cut interest rates.

The tone of Waller's comments overall is that he is leaning towards a slightly more dovish stance.

Waller said in a Bloomberg interview that given the cadence of the administration’s shifts on import taxes, it wouldn’t be until some time this summer that some sense of how this is playing out will start to emerge, which suggests no imminent change in monetary policy. That sense of patience on policy was shared by Cleveland Fed President Beth Hammack, who spoke to CNBC.

In her first broadcast interview since taking the reins at the Cleveland Fed, Hammack noted the high level of uncertainty now and did not commit to a specific course of action regarding interest rates.

“I think we need to be patient. I think this is a time when we want to make sure we’re moving in the right direction, rather than moving too quickly in the wrong direction. So I would rather take our time to make sure we’re looking at the data, the hard data, which is currently excellent.”

Hammack’s remarks come at a sensitive time for the Federal Reserve, which has been left to assess the impact of President Trump’s tariffs on both inflation and employment.

Most analysts expect the Fed to be forced into a more dovish stance should the tariffs be reinstated in some form following the 90-day moratorium. Fed Chairman Jerome Powell has always leaned towards a slightly hawkish stance, but that has only been while the stresses on the economy have been driving inflation.

If the focus changes to growth, Powell’s focus will also likely change, since there is no long-term evidence that he is entrenched in his current view.

The sharp trade tariff hike will be inflationary for the US economy and could drag it to “quite close to recession”, Investment and Brokerage House Nomura said yesterday.

According to Robert Subbaraman, Nomura’s head of global macro research, the higher prices will reduce consumer demand, even as a high level of uncertainty is causing businesses to slow down their investment.

“The US growth is going to slow quite sharply, close to recession. Our forecast does not show a recession at this point, but it’s quite close to a recession. So for the full year, we have growth of 1.4% for the US. Before April 2, our forecast was 2%. So we have lowered it,” said Subbaraman.

There is an argument in Congress about the President’s attacks on Jerome Powell, which have become increasingly personal over the past few weeks. Democrat Senators and Congressmen want to reinforce the Fed’s “protection” from interference, while more hardline Republican politicians feel that the President has every right to criticise Fed policy.

The dollar appears to be consolidating at lower levels. Yesterday, it opened at 99.27 and rallied to a high of 99.79 but drifted back to where it opened, closing just two points higher at 99.29.

The Greenback’s short-term fate is currently in the hands of day traders. For that reason, it lacks a trend, since it nearly collapsed following the April 2nd “proclamation.”

European Central Bank (ECB) President Christine Lagarde said yesterday that U.S. tariffs could have a disinflationary impact on Europe, particularly if China redirects its surplus exports to the European market in the absence of countermeasures from the EU.

China will have overcapacity and will want to reroute exports elsewhere, possibly to Europe, and that would have a dampening effect on prices. However, she emphasised that the new effect on inflation remains uncertain due to multiple contrasting factors.

European markets climbed into the green on Tuesday, shaking off earlier losses, as European Central Bank President Christine Lagarde told CNBC the disinflation process in the euro area was “nearing completion.” In concert with several colleagues on the ECB’s Governing Council, she does not expect there to be a need for interest rates to fall into “stimulation territory”.

The current rate of 2.25% is at the top of the ECB’s range of 2.25% - 1.75%, where it feels that rates are “neutral”, neither stimulating nor restricting growth.

Christine Lagarde said that there was “scope for negotiations” between Europe and the U.S. during Trump’s 90-day pause on his full tariff policy, set to otherwise leave the European Union with a blanket rate of 25%.

A new era of uncertainty in the global economy could push government debt to its highest level since World War II, and the eurozone is likely to be among the hardest hit, the International Monetary Fund warned this week.

Although the latest figures show that debt fell overall in 2024 with Greece having seen its debt fall the most, although it remains at the top of the “debt charts”, there are concerns that if there is an ongoing trade war which lasts as long as the Trump Presidency, the IMF forecasts an increase in global public debt to 95% of GDP in 2025 and almost to 100% by the end of the decade. There were particularly severe forecasts for France and Germany.

The eurozone economy's long-standing structural headwinds have been exacerbated by a surge in uncertainty, which may get even worse in the wake of U.S. trade tariffs, European Central Bank policymaker Isabel Schnabel said earlier this week.

Speaking at an economic forum in northern Italy, Schnabel said the ECB would look closely in the coming weeks at the implications for eurozone growth and inflation of the tariffs announced by U.S. President Donald Trump. The ECB has been given a small amount of breathing space to examine the implications of the 90-day pause announced by Trump recently.

For now, Schnabel said recent events had caused "a dramatic surge in uncertainty", which may be only the beginning.

The dramatic rise in the value of the Euro, despite it being unlikely to continue in the longer term, that is, more than six months, is having a beneficial effect on inflation in the short term, which is allowing the ECB to continue to cut rates.

The Euro is well below the highs it made in the immediate wake of Trump’s “Liberation Day” speech, but it remains well-supported on any dips. Yesterday, it reached a high of 1.1402, where it attracted sellers in early Asian trade, which has, so far, driven it to a low of 1.1305.

Have a great day!