Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Yesterday, Bank of America’s much followed Global Fund Manager Survey showed its biggest-ever drop in allocations to US stocks as well as a big jump in cash allocations. As the survey’s lead author Michael Harnett notes, this is bullish, if other investor sentiment indicators — a heavy shift to Treasuries, say — follow suit. The market correction won’t stop until the last of the optimists is chased out. On the economic data front, both new housing starts and industrial production came in above expectations for February. More bullishness? Nope: Wall Street economists dismissed both reports as a last hurrah before tariff and labour market uncertainty squashes next month’s numbers. The stock market agreed with this dour assessment and Big Tech, in particular, had another ugly day. Email us: [email protected] and [email protected]. The market can’t wait for April 2The US market decline that began a month ago is the product, mainly, of worries about the Trump administration’s economic policies. That much is universally agreed. There is less agreement about how much of the problem is the prospect of policies that will diminish corporate earnings, and how much is the total lack of clarity about what, exactly, the policies will be.Several times in the past few days, Wall Street people have told me their clients were hoping that the fog might clear on April 2, the day the administration has picked to announce both reciprocal tariffs on countries and sector tariffs on strategic industries. Will we get policy clarity in two weeks’ time? Or will the mess only get messier? In the short term, there is no more important determinant of the market outlook. Thierry Wizman of Macquarie articulated investors’ hopes in a note yesterday (my italics): With the new US Trade Representative Jamieson Greer taking office [Monday], there is renewed hope that there will be more regularisation and rationalisation of the US administration’s import tariff policies and programme, as well as an impetus for more negotiation with trade partners. We believe that ‘peak chaos’ with regard to tariff policy is behind us . . . The new USTR was reported to be likely to create a formula for a single rate for each country, based on that country’s average tariff level, as well as other measures the Trump team considers discriminatory . . . those tariff rates would not be static, and could be adjusted based on whether a country has been co-operative in reducing its tariff rates. We think that this signals a new flexibilityI spoke to Wizman yesterday and it is important to note that he thinks significant ambiguities may remain after April 2. But he does believe that a more regular, predictable, conventional policy process may take hold soon. His reason is that the administration, whatever it may be saying, knows that the policy chaos is doing real damage. And he is encouraged by hints in recent news stories that a new approach is taking shape. On Monday, Bloomberg wrote of Greer:President Donald Trump’s top trade negotiator is attempting to inject order into sweeping new tariffs expected next month . . . Through the past two months of tariff chaos . . . Greer has largely been out of the picture . . . Under Greer, USTR has reinstated parts of a traditional policy process that were missing from prior tariffs imposed on Canada, Mexico, China and metals by asking for public comment on the reciprocal duties. That gives the trade office a formal way to receive feedback from businesses and other stakeholders.Most importantly, the article noted that officials like Scott Bessent and Kevin Hassett “have expressed an urgency to move on to tax cuts and regulation rollbacks that investors crave”. This all sounds quite promising for fans of order, predictability and profit. And, yesterday, The Wall Street Journal reported that the White House was inching towards a plan (the concept of a plan?) for reciprocal tariffs. A three-tier approach, designed to avoid the picky business of country-by-country, product-by-product rule writing, was considered and discarded, in favour of an “individualised approach” with “more flexibility.” How to convert tariffs, non-tariff trade barriers, industrial subsidies and currency controls into a single tariff rate for each US trading partner is under discussion now. Meanwhile, additional 25 per cent tariffs on cars, semiconductors and pharmaceuticals are planned.  Yesterday morning, Treasury secretary Bessent appeared on television with clear intent to reassure. He confirmed that each country would face an individual tariff rate, and emphasised US willingness to negotiate: if partner countries removed trade frictions, tariffs would come down. For strategic industries, the tariffs would remain. He also noted that there were 15 countries with whom the US ran big deficits that were the focus of the administration’s attention (“the dirty 15”).The administration is trying to transmit clarity, directly and indirectly. But there is no concealing the remaining ambiguities. Bessent did not provide much clarity on which industries, besides steel and aluminium, the administration considered strategic. Whether or not the list includes pharmaceuticals, for example, will make a big difference to markets; it has been widely assumed that drugs will be carved out, as they often have in the past. And when pressed on whether tariffs would be “stacked” — if reciprocal tariffs would come on top of strategic ones — he equivocated, and said the trade representative and commerce departments were in charge. Which leads to the two overarching questions. First, can this administration fall into line behind a single plan, as orchestrated by Greer or someone else? And how will other countries respond — what will the mix of negotiation and retaliation be? These responses will play out over time, but investors need a road map from the US side at the outset. Unhedged makes no predictions for April 2 — we’re no good at politics — other than to say that it will be a very important day indeed. If you have insights, by all means, send them along. One good readMore on aid.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

The central bank is highly likely to keep its benchmark interest rate at 4.5% at its March meeting.
The latest monetary policy decision comes at a time of heightened uncertainty over potential trade tariffs and as the U.K economy shows signs of stalling, with monthly growth data showing anemic output.
Thursday’s meeting comes just days before U.K. government taxation changes come into force that have proven unpopular with businesses, which say their rising tax burden could dent growth further.

The Bank of England in London on Feb. 12, 2024.
Henry Nicholls | Afp | Getty Images

The Bank of England is widely expected to hold interest rates when it meets on Thursday, as the U.K. faces economic headwinds both at home and abroad.
The central bank is highly likely to keep its benchmark interest rate at 4.5% at its March meeting, given the unpredictability of President Donald Trump’s trade tariffs and a fledgling global trade war, and how those factors could affect inflation in the U.K.

The BOE is also convening as the U.K economy shows signs of stalling, with monthly growth data showing anemic output. Thursday’s meeting comes just days before U.K. government taxation changes come into force that have proven unpopular with businesses, which say their rising tax burden could dent growth, investment and jobs.
For its part, the Bank of England already warned at its last meeting in February that it would tread carefully, as it downgraded the U.K.’s growth forecast for 2025 and predicted a temporary rise in the rate of inflation to 3.7% — above the bank’s target of 2% — which BOE policymakers said would be caused by higher energy prices.
As for Trump’s tariffs, Bank of England Governor Andrew Bailey warned earlier in March that potential trade duties were another threat to the country’s economy, and growth, telling British lawmakers that “the risks to the U.K. economy, and indeed the world economy, are substantial” and that U.K. citizens would have less money “in their pockets” as a result of tariffs.

Dissent in the committee

In February, a majority of seven members out of the nine-strong monetary policy committee voted in favor of a cut, with two of the MPC’s members, including well-known “hawk” Catherine Mann, voting for a larger trim.
Economists say the voting split of Thursday will be closely watched.

“There are visible signs of disagreement at the Bank of England on the pace of rate cuts required this year. But with wage growth and inflation remaining sticky, we expect the Bank to keep rates on hold this Thursday, ahead of the next rate cut in May,” James Smith, developed markets economist at ING, said in a note Monday.

Andrew Bailey, governor of the Bank of England, during a financial stability report news conference at the central bank’s headquarters in London on Nov. 29, 2024.
Bloomberg | Bloomberg | Getty Images

“Drama is not often synonymous with the Bank of England. But February’s meeting was nothing short of a bombshell. [BOE committee member] Catherine Mann, who for months had led the opposition to rate cuts, surprised everyone with her vote for a 50 basis point rate cut. And that posed the question: if the arch-hawk is prepared to vote for faster rate cuts, will the rest of the committee soon follow suit?,” Smith questioned.
“For all the excitement, the answer seems to be no. Most officials that have spoken since have struck a much more cautious tone,” he noted, with ING predicting three more rate cuts will take place this year. It nevertheless conceded that inflationary pressures are putting the central bank in an “uncomfortable position.”

Budget changes?

The BoE is meeting days before the U.K. Treasury’s “Spring Statement” on March 26, when British Chancellor Rachel Reeves presents an update on her plans for the British economy.
The finance minister is coming under pressure to cut public spending, raise taxes further or to bend the government’s self-imposed fiscal rules amid higher borrowing costs, with the yield on U.K. debt picking up in recent months. The treasury has mooted the idea of cutting spending on welfare payments, but the idea remains controversial among lawmakers in the center-left Labour government.
Reeves’ ‘Spring Statement’ will be announced alongside economic forecasts from the Office for Budget Responsibility, the U.K.’s independent economic and fiscal forecaster, which gives its assessment on the likely impact of the government’s taxation and spending plans that were announced last fall.
That budget included £40 billion ($51.9 billion) worth of tax rises — with the burden falling mainly on businesses — to plug a black hole in the public finances and allow for investment in public services.

Rachel Reeves, U.K. finance minister, speaking on CNBC’s “Squawk Box” outside the World Economic Forum in Davos, Switzerland, on Jan. 22, 2025.
Gerry Miller | CNBC

The OBR is widely expected to downgrade its U.K. economic forecasts, putting further pressure on Reeves to amend her policy plans.
“It was not supposed to be like this. U.K. chancellor Rachel Reeves planned to present the government’s official biannual forecast on 26 March without making any changes to policy. However, a rise in market interest rates, high borrowing in fiscal year 2024-25, and a possible downgrade to the Office for Budget Responsibility’s productivity growth assumption have conspired against her,” Andrew Wishart, senior U.K. economist at Berenberg Bank, said in analysis Monday.
“Without spending cuts or tax rises, the OBR would forecast the government missing its fiscal rule of funding day-to-day spending entirely with tax revenue by 2029-30. To avoid six months of speculation about how Reeves will make up the shortfall in the next fully-fledged budget in the autumn, the chancellor must act now,” he added. More

Being a blog means FT Alphaville can always react quickly to news developments. Unrelatedly, let’s write about last month’s Bank of England Monetary Policy Committee meeting.As ING’s James Smith wrote in a note published this week (ahead of the next MPC decision, which will be announced on Thursday):Drama is not often synonymous with the Bank of England. But February’s meeting was nothing short of a bombshell. Catherine Mann, who for months had led the opposition to rate cuts, surprised everyone with her vote for a 50bp rate cut. And that posed the question: if the arch-hawk is prepared to vote for faster rate cuts, will the rest of the committee soon follow suit?From an MPC-watching, inside-baseball perspective, Catherine Mann was already the second-most-interesting member of the current lineup*, and this dovish pivot adds a new feather to her plumage.Which is a good excuse to do some more trivial analysis. As we’ve previously observed (see parts one, two and three), there are lots of ways of looking at the MPC’s voting patterns. One of our favourites is the hawk/dove spectrum, on which we ranked members past and present by net their voting pattern (hawk votes minus dove votes). Here’s how that looks with the latest data (see you tomorrow, mobile users):Some content could not load. Check your internet connection or browser settings.Net figures miss nuances. Two members with the same notional dove/hawk score might actually have had radically different voting patterns. A score of zero, for example, could indicate a flawless record of voting with the majority, but could also capture a serial rebel who happened to fly with the hawks and doves in equal measure.To look at this effect, we can sort all MPC members into one of four categories based on their patterns of rebellion: those who always won their votes, those who only ever rebelled hawkishly (“pure hawks”), those who only ever rebelled dovishly (“pure doves”), and those who rebelled in both directions.This requires us to come up with two new bits of nomenclature. For the serial winners, we’ve settled on “turkey vultures”, with Bryce reasoning that as carnivores that don’t hunt, they land neatly between hawks and doves. For the both-way rebels, we picked “hybirds”, the category which Mann recently joined (having previously been a pure hawk).Armed with this taxonomy, here’s a mildly interesting chart:Some content could not load. Check your internet connection or browser settings.We were surprised that hybirds are so high up (note that if we treat ex-dep gov Ben Broadbent as two separate entities in his internal and external phases, there would be one more turkey vulture) — and that the distribution is so even.Let’s try breaking down those bars above to show the actual members involved, ordered left to right from more dovish to most hawkish (for hopefully obvious reasons, not an interesting measure for the turkey vultures):Some content could not load. Check your internet connection or browser settings.There’s… something here. Observations:— Having recent joined the hybirds after a long spell as a pure hawk, Catherine Mann is easily the most hawk-skewed hybird.— Conversely, Stephen Nickell is the most dove-skewed hybird.— Sir Charlie Bean (former deputy governor for monetary policy) is the only deputy governor to have rebelled solely in a dovish way.— Pure hawks have a much more even mix in terms of internal/external.— Bean’s predecessor, Rachel Lomax, is the only MPC member to have rebelled evenly in both directions (having gone three times each way).By this measure, Mann is exceptional — for now, at least. But this possibly undersells her pivot. After all, years might have passed between any given hybird’s hawk and dove turns, while Mann pivoted from hawk to dove in the space of two meetings:Some content could not load. Check your internet connection or browser settings.Has such a rapid shift ever happened before?Yes. The quickest one-member pivot in MPC history was external member William Buiter, who flipped between meetings in the late ’90s. Pointlessly, we can track the gaps between each hybird voting one way (hawk/dove) and then the other…Some content could not load. Check your internet connection or browser settings.…and see Mann’s pivot is the second-fastest on record.Obviously this is ✨ reductive ✨ in that it only reflects hawkishness or dovishness as expressed by actual vote rebellions, and ignores that a swap from a rebel stance to voting with the majority is equally significant to the other way around. And, by our chosen definition, in all instances but Buiter’s 1998 turn, the pivot encompasses a period of neutrality, during which anything might have happened (Sir Dave Ramsden’s first “pivot” took nearly three years, and covered most of the Brexit process and the height of Covid-19). Basically: the bigger the gap, the more trivial the pivot.So what’s the story behind Buiter’s one-meeting swap — to raise rates at the August 1998 meeting, and then to lower them in the September 1998 meeting? The BoE’s spreadsheet of MPC votes records these only as “increase” and “decrease” rather than a specific preferred rate, but the minutes of the time offer more detail.At the August 1998 meeting, members were fretting about Asian economies; US growth and stock prices; discrepancies between Office for National Statistics data and private surveys; and wage growth feeding through into inflation.The MPC eventually ended up in a three-way split, with seven votes to hold Bank Rate at 7.5pc, one to cut (DeAnne Julius) and Buiter’s vote to raise.Buiter’s rationale is spelled out in the minutes (our emphasis):The arguments for raising rates were as follows. The central projection for inflation was above the target throughout the forecast period, except at the 2 year horizon. The risks to inflation were, moreover, on the upside throughout – and especially towards the end of – the forecast period, so that the mean projection of inflation was above 2 ½% throughout the forecast period. On one view, it seemed likely, notwithstanding the considerable uncertainties, that inflation would be increasing beyond the two-year horizon, as the effects of sterling’s appreciation on net trade wore off and as the impact of government spending on domestic demand came through. Thus, just as inflation outturns had persistently been above target in the past, it was more likely than not that inflation would be above target in the foreseeable future. This would be damaging to credibility, and called for an immediate 25 basis point rise.By September, everything and nothing had changed. In the intervening period, Russia had slumped into a financial and political crisis, the Japanese growth outlook had worsened, and commodity prices had come under pressure. Meanwhile, BoE staff were, uh, still struggling to reconcile ONS figures with private surveys.Once again there were seven votes to hold, but this time Buiter swung, joining Julius in the dovish camp. Their rationales appear to be separate (our emphasis):37. On a second view, although the outturns for official data on domestic activity were broadly as expected, business surveys were very weak for the second consecutive month, the equity market had come off the top and the correction might still have a long way to go. The change in the world outlook was also significant news. Taking these factors together there was sufficient evidence already to shift the central projection for UK inflation from above the target to below. On this basis, rates should now be cut by 25 basis points. 38. On a third view, there had already been a danger of undershooting the inflation target and the previous case for a cut in rates was reinforced. The full extent and timing of the reduction would be a matter of tactics but it should start immediately. Even after interest rates started to fall, sterling would be subject to upwards as well as downwards pressure, given the relative strength of the UK economy and investors seeking a safe haven from world events.Assuming they are separate, the second argument (point 38.) about the risks of an inflationary undershoot appear to be Julius’s, given they echo those from a month before. Which would suggest those following point 37 are Buiter’s. The facts changed, and he (majorly) changed his mind.ING’s Smith continues:The disagreement boils down to two things. First, Mann believes in a much more activist approach to setting policy than her peers. She was more aggressive on rate hikes, and now takes the same view on cuts. We sympathise with that view; the fixed-rate nature of UK lending (especially mortgages) means that policy changes take longer to feed through than they once did. If you believe the outlook for growth and inflation is shifting, then gradual rate cuts are initially much less effective than they once were.And that’s the second point: Mann does believe the outlook has materially shifted. In recent comments, she has talked about the risk of “non-linear” falls in employment, in response to hefty tax hikes coming through for employers next month.Mann may be right or wrong — and may have been right or wrong in the past — but a willingness to pivot is basically good, we reckon. Glory to the hybirds.*First place is obviously Sir Dave, Keeper of the QT Envelope. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Giorgia Meloni has criticised Brussels for responding with retaliatory tariffs to US levies and warned that the tit-for-tat risks fuelling inflation in the EU.  The Italian prime minister, who is meeting fellow EU leaders at a summit in Brussels on Thursday, urged the European Commission to open urgent negotiations with the Trump administration to avert the damaging consequences of a trade war.“It is not wise to fall into the temptation of reprisals that become a vicious circle in which everyone loses,” she told the Italian parliament on Tuesday. “We must continue to work concretely and pragmatically to find possible common ground and avoid a trade war that would benefit neither the US nor Europe.”Her comments come after the commission — which runs trade policy on behalf of the bloc — said it would impose tariffs of up to 50 per cent on US imports, including whiskey, motorcycles and jeans from April 1 in retaliation for Washington’s decision to reintroduce a 25 per cent levy on imports of steel and aluminium. US President Donald Trump has since threatened to impose a 200 per cent tariff on all European alcohol imports, including Italian wine and spirits.Meloni, a rightwing politician and the only European leader to attend Trump’s inauguration, has walked a tightrope between maintaining good relations with Washington while siding with the EU in describing Russia as the aggressor in its war with Ukraine. On Tuesday she expressed support for Trump’s efforts to end the war and for restoring intelligence sharing and military assistance to Ukraine after Kyiv agreed to back his proposed 30-day ceasefire. But she also warned that an escalating trade war with the US would reduce Europeans’ purchasing power and force the European Central Bank to raise interest rates.“The result would be inflation and monetary tightening that dampens economic growth,” she warned. “Italy’s energies must be spent in the search for common sense solutions between the US and Europe.”Meloni also poured cold water on French and German calls for Europe to chart its own path on defence, insisting that without the US there was no viable security for the continent, including for Ukraine.“It is right that Europe equips itself to do its part, but it is at best naive and at worst crazy to think that today I can do it alone without Nato, outside that Euro-Atlantic framework that has guaranteed security for 75 years,” she said. The Italian leader said her coalition was committed to strengthening Italian security but expressed concerns about ReArm Europe, a Brussels plan to raise €150bn in loans for national defence investments and exempt military spending from the bloc’s fiscal rules. She said the name evoked a scramble for lethal weapons — something that is jarring for many in Italy, with its strong, church-influenced pacifist streak.Rome’s capacity to make use of the relaxed fiscal rules and take on more debt for defence remains limited due to its current debt burden of more than 135 per cent of GDP. Meloni said she would move prudently on extra borrowing. She also expressed serious reservations about a Franco-British initiative to send European troops to Ukraine as peacekeepers, describing it as a “very complex, risky and ineffective option”.But she said her coalition agreed with the need to beef up Italy’s ability to fend off cyber and other hybrid attacks, including on undersea cables and energy infrastructure.   “We have always believed in that ambitious — and I think now unpostponable — goal of building that solid European pillar of Nato.”Additional reporting by Giuliana Ricozzi More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Germany’s central bank bosses have often accused their Eurozone counterpart of being too aggressive in cutting interest rates, but now the Bundesbank has backed up some of their old arguments with an in-house artificial intelligence tool.Bundesbank economists used their own AI to screen about 50,000 sentences from European Central Bank monetary policy statements and speeches, tasking Meta’s multilingual large language model to analyse the hawkishness of the bank’s communications since 2011. The research found the ECB’s tone from that time has been “predominantly dovish”, meaning rate-setters were not overly concerned about inflation risks, stressed economic weaknesses and signalled monetary easing. It said the bank’s policies remained dovish even after it hardened its rhetoric when inflation started to rise in 2021.Bundesbank’s AI made a striking observation about the tenure of then-ECB president Mario Draghi, including when he pursued historically loose monetary policy during the past decade in an effort to avoid deflation. During that time, ECB communications on wider economic sentiment was noticeably more upbeat than its dovish narrative on inflation and interest rates, the Bundesbank analysis found. The research can be seen as supportive of arguments made by former Bundesbank bosses such as Axel Weber and Jens Weidmann, who routinely sparred with the ECB. Weidmann publicly said the Eurozone bank had “overshot the mark” with its dramatic monetary easing. Draghi once described the German banker as Mr No, or Nein zu allem.Draghi, who is credited with saving the euro after he indicated the ECB would do “whatever it takes” to stabilise the common currency, was dubbed “Count Draghila” by the German tabloid Bild, which accused him of “sucking dry” the bank accounts of German savers by imposing negative interest rates. According to the Bundesbank AI analysis, the ECB’s dovish stance was mostly in line with weak growth and overall adverse economic sentiment — in particular during the European debt crisis, the Covid-19 pandemic and the early days of Russia’s 2022 invasion of Ukraine. But it spotted a mismatch in the run-up to the 2022 price surge, when inflation shot up to as much as 10.6 per cent: the ECB’s wording on inflation risk became more hawkish from early 2021, but its stance on interest rates remained dovish for almost a full year. The hawkish tone on inflation risks peaked in June 2022 before the ECB started to finally respond with rapid interest rate increases a month later. While the Bundesbank has moderated its tone towards the ECB in recent years, the study’s findings could potentially underpin the widespread view among economists that the Eurozone’s central bank waited too long to respond to inflation risks that had long become visible.“The ECB governing council emphasised the increase in inflation at the time but assessed it was temporary,” the study says. “The inflation narrative remained highly hawkish until the end of 2022,” the Bundesbank finds, adding that the inflation narrative became “gradually less hawkish” over the past two years and “most recently” has been balanced.The ECB declined to comment on the findings. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The UK’s largest car insurers have piled hidden costs on top of double-digit interest rates for customers paying in monthly instalments, according to people familiar with the practice.Admiral and Aviva are among the car insurers that have pre-screened customers who opt to pay their premiums monthly rather than annually, one analysis of the practice found, and have raised the prices they charge such clients as a result.So-called double-dipping is expected to be scrutinised as part of a probe by the Financial Conduct Authority into whether insurance customers using “premium finance” — or paying in monthly instalments — are being overcharged, according to a person briefed on the matter.Matthew Brewis, head of insurance at the FCA, has described premium finance as “a tax on the poor” and the regulator is examining whether insurers’ use of the product breaches the consumer duty rules requiring them to give customers a fair deal. Admiral told the FT that it makes its costs ‘clear’ to customers More

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