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13 May 2025 | 3 minutes to read
In a widely anticipated move, the US Federal Reserve (Fed) decided to keep interest rates steady for the third meeting in a row last week. The rate setting Federal Open Market Committee (FOMC) voted unanimously to keep rates between 4.25% and 4.5%. The Committee stated that the uncertainty about the economic outlook has increased while the risks of higher unemployment and higher inflation had risen. The Fed has not cut rates since December 2024 and has suggested it will remain in wait-and-see mode until it gains a fuller understanding of the effects of the Trump administration’s trade tariffs on the US economy. Fed Chair Jerome Powell went as far as to say, “it’s not at all clear what the appropriate response for monetary policy is at this time.” Powell did also reaffirm the view that the US economy continues to demonstrate a good level of resilience, but until it becomes clearer which way it might turn, it is challenging for the Fed to assess the threats to its dual mandate of keeping inflation to 2% and sustaining maximum employment.
Meanwhile, the Bank of England (BoE) did loosen monetary policy, cutting interest rates by 25 bps to 4.25%. The move was very much expected, however there was some surprise at the split amongst members of the rate setting Monetary Policy Committee (MPC). Having anticipated a 9-0 or 8-1 vote in favour of a quarter point cut, market participants were a little surprised to see the minutes of the Bank’s meeting show that the committee was more divided, with five of the nine members voting to cut rates to 4.25%, two voting for a larger 50bps cut, and two voting for no change. Markets are now anticipating two further rate cuts over the course of 2025, with the Bank maintaining its “careful and gradual approach” to monetary policy, although also noting that the MPC was not on a “pre-set path” given the prevailing uncertainty surrounding US and global trade tariff machinations. The Bank lowered its peak inflation forecast for this year from 3.75% to 3.5% and marginally increased the 2025 growth forecast from 0.75% to 1%.
Prime Minister Sir Keir Starmer announced a “landmark” trade deal between the UK and India, bringing three years of negotiations to a close. The deal, which will make it easier for the UK to export certain goods (including high value autos and whisky) to India and reduce taxes on clothing and footwear imported into the UK, was talked up by the government as the “biggest and most economically significant” bilateral trade agreement the UK had signed since formally leaving the European Union in 2020. Officials stated that the deal will increase trade between the two nations by £25.5bn a year by 2040 and add some £4.8bn a year to the UK economy. Aside from trade in goods, the deal also included social security exemptions for Indian workers temporarily transferred to the UK by their employer, and vice versa, such that employees and employers are only making contributions in their home country. Similar agreements exist with a number of other jurisdictions to avoid a double charge.
In what appears to have been a busy week for Starmer, an agreement was also reached between the UK and US to reduce or remove tariffs on certain goods. Whilst the base level 10% tariff previously announced by President Trump still applies to most UK goods entering the US, a deal was reached to reduce or remove tariffs on UK autos, as well as aerospace goods and UK steel and aluminium. In a return measure, the UK is to remove tariffs on US beef imports, with a limit of 13,000 tonnes annually – although the government insisted there would be no weakening of UK food standards on imports. The deal is a long way short of a free-trade agreement and is relatively narrow in scope, however it may at least demonstrate a willingness and resolve to address the prevailing global trade challenges.
Early signs of slowing shipments from China emerged at US West Coast ports last week, even as China’s headline export data for April showed strong growth. China’s exports rose over 8% year-on-year in April, surpassing expectations, driven by strong demand from overseas manufacturers who sought to act in advance of anticipated US tariffs. Nevertheless, exports to the US fell sharply, down 21% in April year-on-year. The overall rise in Chinese exports is partly attributed to transshipments through third party countries and contracts signed prior to announcements on US tariffs. Exports to Association of Southeast Asian (ASEAN) nations have jumped sharply in recent months, with the breakdown by product showing auto exports from China hit a new record high, despite EU tariffs on Chinese electric vehicles imposed from late 2024.
Separately, China’s manufacturing Purchasing Managers Index (PMI) activity fell to a 16-month low in April, with a gauge on new export orders dropping to its lowest level since December 2022. Contraction in the Chinese manufacturing sector likely means production and new orders have slowed.
Container ship arrivals to the US fell sharply in late April, with the ports of Los Angeles and Long Beach – key gateways for Asian trade – seeing a 44% year-on-year decline in docked vessels last week compared to a year earlier. These ports, which handled 20 million containers last year, are beginning to feel the impact of US tariffs on foreign goods, with a growing number of dockings at US ports being cancelled for the coming weeks. The effect of falling US export orders is only now starting to appear, as shipments from China take about 30 days to reach the West Coast and up to 80 days to reach New York. The full impact of US-China tariffs is still only beginning to unfold.
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