Economy

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersIn frequently declaring their monetary policy setting to be “restrictive”, European Central Bank president Christine Lagarde and Bank of England governor Andrew Bailey have raised the immediate follow-up question: what is the neutral level of interest rates, neither constraining nor stimulating economic activity? Luckily for us, both central banks published their latest assessments of natural/neutral rates late last week, allowing me to compare and contrast. One thing to note is that I am making no distinction between natural and neutral rates here. The ECB likes the word “natural”, while the BoE prefers “neutral”. They are talking about the same concept.There are many similarities in their assessments and, for additional spice, they both managed to insert a glaring contradiction for our delight. Where is the neutral rate? Both the ECB and BoE stressed that the neutral rate is highly uncertain and can only be described as a range, which might change.In nominal terms, Lagarde said in Davos that the range of neutrality lay between 1.75 per cent and 2.25 per cent. Not surprisingly, this is also the range outlined in the ECB’s formal assessment.The BoE’s assessment was more cautious, harking back to previous work from 2018, which highlighted a range of 2 to 3 per cent with a modal estimate of 2.25 per cent. It now thinks the range is a bit higher, but is very uncertain about how much. Deputy governor Claire Lombardelli said: “You know, you can add all that up and say perhaps we’re in the region of 2 to 4 [per cent]. It’s very broad.”The benefit of both these assessments is that current interest rates are above these levels, so officials can say they are restrictive without further qualification. Do officials use these estimates?Yes and no. The neutral rate number sits in the background within many macroeconomic models providing a gravitational force, gently pulling forecasts towards this equilibrium in time. They also help officials think about the degree of stimulus or restrictiveness in the stance of the central banks’ policy. But both banks stressed that on a day-to-day basis, the estimates of neutrality do not loom large. The ECB said its estimates should not be taken very seriously. “These cannot be seen as a mechanical gauge of appropriate monetary policy at any point in time,” it said, and highlighted (again) that the bank takes decisions based on the inflation outlook, the dynamics of underlying inflation and its assessment of the effect of monetary policy on the economy. The BoE said its assessment of the neutral rate “plays a role” in policy setting, but this comes alongside many other considerations including financial conditions, trends in household savings, surveys of market participants and assessments of the economic cycle. Bailey said: “There is a high degree of uncertainty around this and, as we say, that’s why we don’t use it for setting interest rates.”Why is the neutral rate so darn uncertain?Because the neutral rate is a theoretical concept, it cannot be measured and can only be estimated within economic models. Different models will produce different results. Each will produce a range of plausible answers and the latest estimates, which, while most useful for policymaking, are also the least certain and most prone to revision.The ECB did a rather better job than the BoE in highlighting the uncertainties. It published estimates with confidence bounds and, unlike the BoE, did not publish guesswork about the reasons for potential recent movements in neutral rates. The chart below shows various estimates of the Eurozone’s neutral rate. To keep everything nominal, I have added 2 percentage points to each number in the chart, so it is slightly different from the original. It shows a wide range and you can see Lagarde’s 1.75 to 2.25 per cent estimates in the blue and yellow shading along with the ECB’s current interest rate at 2.75 per cent.Some content could not load. Check your internet connection or browser settings.The ECB’s concern about a wide potential range of neutral rate estimates is shown in the second chart, which focuses on the Holsten, Laubach and Williams model collated by the New York Fed. Apart from the scale of revisions, early estimates are often far from later estimates for the same period, showing the difficulty of using this data in real time. Some content could not load. Check your internet connection or browser settings.The glaring contradictionsMany of you will already have noticed the glaring contradiction in the ECB work because it is on show in the charts. Lagarde said the neutral range was 1.75 per cent to 2.25 per cent, but that is true only if you ignore the HLW measure which, the ECB itself noted, had a nominal range between 1.75 per cent and 3 per cent. Including all the measures, it is no longer clear that ECB policy is restrictive in comparison with estimates of neutral.The ECB sought to explain this inconsistency by saying the 1.75 per cent to 2.25 per cent range included all measures “for which an update to the end of 2024 is available”. You have to wonder whether this form of words was used because the president had declared the neutral range in a TV interview in January.The glaring contradiction from the BoE is that both officials and Bailey stated confidently that the neutral rate was a “global concept” not a domestic UK measure. The problem was that the 2 to 3 per cent range from the 2018 analysis was specific to the UK and much of the wider BoE analysis, such as wondering if there will be a higher neutral rate due to looser fiscal policy in future, does not match current UK fiscal plans. It is lucky that European central banks do not put a lot of policy weight on these estimates of neutral. The numbers are uncertain and the analysis does not stand up well under scrutiny. In his interview with the FT last week, the Finnish central bank governor Olli Rehn put it well when he said the following:We should not constrain our freedom of action because of a theoretical concept, which is nice to talk about when you have a pint in the pub, but it’s not suitable as a concrete benchmark for monetary policy . . .I’m actually fascinated by the discussion and always have been. But the more one studies it, the more one realises the uncertainties Bessent’s brave betFresh from the humiliation of suggesting the Donald Trump administration would move gradually with tariffs only to be blown away by the president’s announcement of huge levies on Mexico and Canada, Treasury secretary Scott Bessent has made another public bet. Speaking about Trump, Bessent said that “he and I are focused on the 10-year Treasury”, when talking to Fox Business last week. “He is not calling for the Fed to lower rates.”That’s quite a bet, since Trump has regularly called for the Fed to cut rates. Bessent doubled down later in the week when talking to Bloomberg. “We are not focused on whether the Fed is going to cut [or] not cut, we are focused on lowering rates, so we are less focused on the specific of rate cuts and [instead] how do we get the whole curve down.”His confidence is brave. And I say that using the British civil service meaning of the word — foolhardy. What I’ve been reading and watchingI wrote about why US and European monetary policy was likely to divergeAhead of Jay Powell’s testimony to Congress this week, members of the Federal Open Market Committee have been downplaying the chances of rate cuts in the near future. You can read speeches from Lorie Logan, Austan Goolsbee and Adriana Kugler here, or see an updated summary of central bank views on the FT’s Monetary Policy RadarCatherine Mann became the most interesting member of the BoE’s Monetary Policy Committee by shifting from being the most hawkish to seeking an immediate half-point cut last week. The FT interviewed her after the decision and asked why she changed her mind. Full transcript on Monetary Policy Radar A chart that mattersThe BoE generated huge amounts of alarmist media coverage last week about it “halving” its growth forecast for 2025. Actually, as the chart below shows, the forecast for 2025 was barely changed from November and subsequent growth was revised higher. What had changed was that the BoE had recognised there had been no growth in the final two quarters of 2024. I was surprised by how difficult it was to gather the data in the chart below. (You have to download two different spreadsheets from separate obscure zip files, ask the BoE to remove password protection on one of them and then merge the data). Given the horrible headlines the next day, perhaps it is time to retire headline forecasts based on annual average GDP levels. In these figures, the previous year is just as important as the year of the “forecast”, so people always misunderstand the results. The BoE (and the ECB) could learn from the Fed, which publishes Q4 2025 over Q4 2024 forecasts and will always avoid this type of misunderstanding. Some content could not load. Check your internet connection or browser settings.Recommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

Duties of 25 percent on steel and aluminum will flow through to car buyers, beer drinkers, home builders, oil drillers and other users of metal goods.America has seen this movie before: President Trump, who imposed stiff tariffs on Monday on imported steel and aluminum, did so once before, in 2018. So domestic industries have a pretty good idea of how the story ends.Manufacturers of trucks, appliances and construction equipment scramble to find U.S. sources of metal inputs, keeping steel and aluminum producers busier than they were before. Companies that need specific alloys that aren’t made domestically are forced to pay more. Prices rise, making end products more expensive.But there may be plot twists along the way. Will Mr. Trump cut deals with some countries, allowing large shipments in without the new duties? Will he set up a process to give companies a reprieve if they can demonstrate a hardship? (On Monday, a White House official said there would be no exclusions.)All of those could affect the outcome, which is why steel users are proceeding with caution. Angela Holt, who runs a precision machining company and heads the board of the Indiana Manufacturers Association, says the potential impacts on businesses are “complex.”“It could affect not only the cost but the availability, depending on their situation,” Ms. Holt said. “It’s highly varied, even among industries — I think it’s going to depend on an individual basis where they source their materials, what the competition looks like.”Lessons From Last TimeAlthough the American steel and aluminum industries are far weaker than they were in their heyday in the 1970s, U.S. companies import only about 26 percent of the steel they use, according to the International Trade Administration, and that number has been falling.Aluminum and Steel Prices Remain Elevated PostpandemicProducer price indices show a slight increase after tariffs were imposed in 2018, but lockdowns and increased demand for goods made a bigger impact two years later.

Source: Bureau of Labor StatisticsBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

Trump said Friday that he would announce reciprocal tariffs — duties that match those levied on U.S. goods by respective countries — as soon as Tuesday, to take effect immediately.
Most economies in Asia had higher average tariffs on imports compared with the U.S. as of 2023, Barclays said, citing data from the World Trade Organization.
“Just because these economies have dodged tariffs for now, [it] doesn’t mean they can breathe easy,” Stefan Angrick, senior economist at Moody’s Analytics told CNBC. “Washington’s mood could shift and tariffs could still be imposed later.”

PORTSMOUTH, UNITED KINGDOM – OCTOBER 28: The container ship Vung Tau Express sails loaded with shipping containers close to the English coast on October 28, 2024 in Portsmouth, England.  
Matt Cardy | Getty Images News | Getty Images

As the specter of Donald Trump’s reciprocal tariffs looms, several Asian economies that enjoy substantial trade surpluses with Washington are scrambling to negotiate favorable solutions with the U.S president to prevent being slapped with higher duties.
Trump said Friday that he would announce reciprocal tariffs — duties that match those levied on U.S. goods by respective countries — as soon as Tuesday, to take effect immediately. Trump did not identify which countries will be hit but indicated it would be a broad effort to help eliminate U.S. trade deficits.

While the details remain unclear, “it is likely that U.S. import tariffs will rise for most emerging Asian economies,” a team of analysts at Barclays said Monday, with the exceptions of Singapore and Hong Kong, with which the U.S. enjoys trade surpluses.
Based on World Trade Organization estimates, most economies in Asia applied higher average tariffs on imports compared with the U.S. as of 2023. India led with a 17% simple average rate on countries with the most-favored-nation status, compared with the U.S. that levies 3.3%. The U.S. enjoys MFN status with most major economies, except Russia. 

China topped trade surplus with the U.S. last year at $295.4 billion, followed by Vietnam’s $123.5 billion, Taiwan’s $74 billion, Japan’s $68.5 billion and South Korea’s $66 billion, according to U.S. Census bureau.
“Just because these economies have dodged tariffs for now, [it] doesn’t mean they can breathe easy,” Stefan Angrick, senior economist at Moody’s Analytics told CNBC, stressing that “Washington’s mood could shift and tariffs could still be imposed later.”
These countries, except for Vietnam, were spared in Trump’s opening tariff salvo thanks to their deep security ties with Washington and large investments in the U.S., Angrick said, but “they shouldn’t get too comfortable.”

Vietnam braces for fallout

Vietnam is “undoubtedly one of the most exposed economies” to being a target of Trump’s trade restrictions, due to its large surplus with the U.S. and sizeable Chinese investment in the country, Angrick said.

Garment factory workers working in a factory in Hanoi, Vietnam on May 24, 2019.
Manan Vatsyayana | AFP | Getty Images

Vietnam’s trade surplus with the U.S. soared nearly 18% annually to a record high last year. The country’s simple average tariff rate on MFN partners stood at 9.4%, according to WTO data.
Beverages and tobacco imported into the country face up to 45.5% tariffs on average, while categories such as sugars and confectionery, fruits and vegetables, clothing and transport equipment are subjected to tariffs between 14% and 34%.
Trump, who in 2019 called Vietnam “almost the single worst abuser” of trade practices, has not made any public remarks about the nation after his re-election in November.
Hanoi has made efforts in recent months to find compromises with Washington on trade. In November, the country vowed to buy more aircraft, liquified natural gas and other products from the U.S.
Vietnamese Prime Minister Pham Minh Chinh last week asked Cabinet members to prepare for the impact of a possible global trade war this year.
Vietnam was a major beneficiary of the trade barriers Trump imposed on Beijing in his first term, which spurred manufacturers to shift production out of China. Consequently, the Southeast Asian nation became one of the largest recipient of foreign direct investment from China.
The U.S. may double its tariffs on Vietnam to 8% if it enforces “full tariff reciprocity,” Michael Wan, senior currency analyst at MUFG Bank said in a note on Monday. That said, he expects a less extreme U.S. stance on the country, with “some sector-specific tariffs” as a more likely possibility.

India readies concessions

India could be the most vulnerable to “reciprocal” tariffs as it imposes duties on U.S. imports that are significantly steeper than U.S. levies on shipments from India, according to estimates by several research firms.
U.S. tariffs on India could rise to above 15% from 3% currently, according to MUFG Bank’s Wen.
New Delhi in its union budget earlier this month reduced tariffs on a range of products including motorcycles, electronic goods, critical minerals and lithium ion batteries. Finance Secretary Tuhin Kanta Pandey said in an interview that “we are signaling that India is not a tariff king.”
Indian Prime Minister Narendra Modi is reportedly prepared to discuss further tariff cuts across a dozen sectors and buying more energy and defense equipment from the U.S. at his meeting with Trump later this week.

Narendra Modi, India’s prime minister, left, and U.S President Donald Trump, arrive for a news conference at Hyderabad House in New Delhi, India, on Tuesday, Feb. 25, 2020.
T. Narayan | Bloomberg | Getty Images

India’s surplus with the U.S., its third-largest trading partner, reached $45.7 billion last year. Notably, the country’s imported agricultural goods were subjected to hefty 39% duties.
During Trump’s first term, he had warm relations with Modi, but during his campaign for re-election, Trump had called India a “very big abuser” with tariffs.
In a phone call with Modi last month, Trump emphasized the importance of India buying more U.S.-made security equipment to reach a “fair bilateral trading relationship,” according to the White House statement.
Some market watchers floated the idea that the two sides may resume discussion on the long-awaited U.S.-India free trade accord. The Joe Biden administration had reportedly rebuffed India’s interest in exploring a free trade agreement, Indian local media reported, citing the country’s commerce and industry minister.
“Such a deal now would require substantial tariff reductions by New Delhi because it has much higher tariff rates than Washington; Trump believes in some degree of reciprocity,” according to Kenneth Juster, distinguished fellow at Council on Foreign Relations.
India could also offer to shift its oil imports from Russia toward the U.S. significantly to align with Trump’s plans of boosting oil and gas exports, said Arpit Chaturvedi, South Asia adviser at Teneo.

Japan as most favored nation

Japan appears to have secured a positive relationship with Trump and could be be shielded from higher tariffs “for now,” analysts said, as Prime Minister Shigeru Ishiba wrapped up a whirlwind visit to Washington over the weekend.

U.S. President Donald Trump gifts Japanese Prime Minister Shigeru Ishiba a book during a joint press conference in the East Room at the White House on February 07, 2025 in Washington, DC. 
Andrew Harnik | Getty Images News | Getty Images

Tokyo maintains relatively low tariffs of around 3.7% on countries with MFN status, according to WTO data. That suggests “little scope for substantial increases in tariffs on Japanese goods,” Kyohei Morita, chief Japan economist at Nomura said in a note Monday.
During the summit last week, Japan agreed to import more natural gas from the U.S. and expressed interest in a project to deliver LNG through a pipeline from northern Alaska.
The two leaders also agreed on a compromise that instead of acquiring U.S. Steel, Japan’s Nippon Steel will “invest heavily” in the U.S. firm. Japan will provide technology for U.S. Steel to manufacturer better quality products in the U.S., Ishiba said.
Japan, which has been the largest foreign investor in the U.S. for five straight years, also pledged to expand that investment to $1 trillion, from $783.3 billion in 2023.
“While Japan may not avoid all the effects of future US tariff policies, Tokyo may avoid the targeted treatment seen with countries like Canada, Mexico, and China,” James Brady, vice president of Teneo said in a Saturday note.
“It may even hope for more lenient trade treatment than other major economies, as it appears to enjoy the status of one of Trump’s most favored nations,” Brady said.

China looks ready to talk

Chinese national flags flutter on boats near shipping containers at the Yangshan Port outside Shanghai, China, February 7, 2025. 
Go Nakamura | Reuters

Beijing’s tit-for-tat measures — including 15% levy on U.S. coal, liquified natural gas, 10% duties on crude oil, farming equipment, cars and pickup trucks — are believed to be modest and restrained.
The tariff package is estimated to cover $13.9 billion worth of China’s imports from the U.S. in 2024, according to data compiled by Nomura, accounting for 8.5% of China’s total U.S. imports and just 0.5% of China’s total imports.
That is significantly lower than the $50 billion worth of U.S. goods targeted during Trump’s first term, said Tommy Xie, head of Asia macro research at OCBC Bank in a note on Monday.
The “calibrated approach” signaled that “China is opting for a more diversified response,” with non-tariff countermeasures such as export controls and regulatory probes into U.S. corporates, while also “leaving room for further negotiations,” Xie added. More

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President Trump announced sweeping tariffs on foreign steel and aluminum on Monday, re-upping a policy from his first term that pleased domestic metal makers but hurt other American industries and ignited trade wars on multiple fronts.The president signed two official proclamations that would impose a 25 percent tariff on steel and aluminum from all countries. Mr. Trump, speaking from the Oval Office on Monday evening, called the moves “a big deal — making America rich again.”A White House official who was not authorized to speak publicly told reporters on Monday that the move was evidence of Mr. Trump’s commitment to use tariffs to put the United States on equal footing with other nations. In contrast to Mr. Trump’s first term, the official said, no exclusions to the tariffs for American companies that rely on foreign steel and aluminum will be allowed.The measures were welcomed by domestic steelmakers, who have been lobbying the Trump administration for protection against cheap foreign metals.But the tariffs are likely to rankle America’s allies like Canada and Mexico, which supply the bulk of U.S. metal imports. They could also elicit retaliation on U.S. exports, as well as pushback from American industries that use metals to make cars, food packaging and other products. Those sectors will face significantly higher prices after the tariffs go into effect.That is what happened in Mr. Trump’s first term, when the president levied 25 percent tariffs on foreign steel and aluminum. While Mr. Trump and President Joseph R. Biden Jr. eventually rolled back those tariffs on most major metal suppliers, the levies were often replaced with other trade barriers, like quotas on how much foreign metal could come into the United States.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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