Taxes, spending, and rate cuts

06 Mar 2025 2 min read

Daily update

US President Trump sounded a partial retreat from the latest trade taxes, granting US car companies a one-month exemption for car parts traded under the revised NAFTA. This rather highlights the fact that US consumers and companies, not foreigners, pay trade taxes. One month does not allow for much response鈥攕ome stockpiling, presumably a lot of lobbying. Market reactions seem to signal a belief that trade tax retreats are possible, but the limited response suggests concern about the lack of policy coherence.
Yesterday鈥檚 rise in German yields has modest economic implications. Increased defense spending may be more positive for European growth than in the past, if less is directed to imported US equipment and more is spent on regional production.
The ECB meets against this interesting backdrop, and is expected to cut rates again. The ECB regards its current policy as being restrictive, and with inflation hovering within a reasonable range of 2% more rate cuts are likely to be coming.
Yesterday鈥檚 flurry of Bank of England speakers also indicated that rate cuts are coming, but the pace is likely to be slower than in Europe; differences in interest rate sensitivity and questions about the extent of disinflation suggest a slower cycle.