Like the US, the UK is hiking interest rates—but for flimsier reasons

Decisions, decisions.
Decisions, decisions.
Image: Reuters
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The US and UK like to play up their “special relationship.” Even the countries’ monetary policies, although not formally coordinated, tend to move together. That’s one way to read today’s rate hike by the Bank of England, pushing its benchmark interest rate above 0.5% (to 0.75%) for the first time in nearly a decade.

The US Federal Reserve launched its hiking cycle earlier than the UK central bank, just as it slashed rates faster and deeper amid the global financial crisis. But with similarly open, service-driven economies, the trends that British and American central bankers track look the same, in many ways. Facing comparable quandaries, year after year, it follows that US and UK interest-rate cycles end up mirroring each other, even if lately the Fed has been leading the way.

That is, perhaps, until now, when conditions on this side of the Atlantic make the Bank of England’s decision much harder to justify (paywall) than the hikes by its counterpart in the US. Most notably, the UK faces the prospect of a “hard Brexit,” which would see it crash out of the EU without a trade deal and other crucial transitional agreements in March next year.

Both the US and UK have seen inflation rise above their central banks’ identical 2% targets in recent months. But inflation in the UK has been high not because of bumper economic growth, but because of a steep decline in the value of the pound and an increase in the cost of imports thanks to Brexit. Even then, inflation in the UK is still lower than the Bank of England thought it would be just three months ago, when it delayed raising interest rates—instead signaling that a hike would be put off until today.

And although the US and UK economies have shown similar paths of post-crisis economic growth, the Brexit vote very obviously led to a decoupling. In 2017, British households here spent more than they earned for the first time since the 1980s. Wage growth also looks weak. The first quarter saw the weakest period of UK economic growth in five years, and the data since has only been “slightly” better. Meanwhile, the US posted GDP growth of 4.1% in the second quarter.

But what’s done is done. Though the Fed plans to raise rates two more times this year, today’s hike in the UK will likely be the last for a while.