Same Tools But Different Economic Glitches For UK And US To Repair

The US and now Britain have put up interest rates but the economic arguments behind their decisions are very different.

In the US, a growing economy, high employment and a boost in business confidence led to a small rate hike in June – the third rise since December 2016.

The Federal Reserve put the rates up as a sign of confidence in the economy.

Putting the rate up is a tool for putting a low fire under inflation which is running around 1.6% in the US.

In Britain, the opposite applies.

Confidence takes a knock

The Bank of England is not confident about the future of the economy. Brexit and the falling pound have spooked business and policy makers who do not know what the future holds.

Confidence has taken a knock, but inflation is around 3% – twice the rate of the US and about 1% more than the Bank of England is comfortable with.

In the UK, policy makers want more certainty and confidence with lower inflation.

If anything, the same approach for differing reasons from two of the world’s leading economic institutions shows that the financial crisis has broken economics and our foremost experts are unsure about how to proceed.

Rather than move in line with policy, economies in the US and UK seem to have a life of their own.

Pound plunges again

In the UK, the Bank of England does not see another rate rise on the cards, while the Fed is tinkering with raising the rate again before the end of the year.

The announcement rather than the rate rise triggered a plunge in the value of the pound.

Paradoxically, a weak pound sends the stock market in London soaring.

At the close, the FTSE100 was up 67 points to 7,555 – a gain of 0.9%.

“We’re going to be in exceptional circumstances for a period, certainly until there’s clear resolution of the future relationship with the EU, and even then, maybe longer than that,” said Bank of England governor Mark Carney.

He added that in “broad brush” terms, the Bank agreed with investors forecasting two more 0.25% rate increases before the end of 2020.