What’s going on at Britain’s central bank?

It seems to be big news that Britain’s economy grew just 0.5% for its latest quarterly rate. I guess economic growth is all relative and this does show an improvement from economic growth of 0.4% for the previous quarter.  But it’s a very small jump.

This seemed to make the news more because that economy’s central bank (Bank of England) just raised the key interest rate in the past week. The Bank of England raised its key lending rate from 0.25% to 0.5%--also a very small hike. Although the Bank of England’s decision to the raise rate was not a surprise, it was big news in itself because this is the first time in about a decade that Britain’s key interest rate was raised. It seems that British policy makers are looking to this small jump in the economic growth rate as validating their decision to raise the key interest rate when they did. They are on the defensive from criticism that this decision to raise rates and tighten monetary policy was taken too early with Britain’s economy not doing as well as it could. They explained the decision to raise the rate as a response to signs that prices are starting to rise in Britain (so a way to fight inflation if it is starting to increase). But people in the know can tell that the real reason was to give the British economic policy makers some space to lower rates again if they have to—if the economic growth real does fall back sharply. This seems ironic to me and not good judgment in economic policy making – like playing games with an entire economy.

Britain has been having a more difficult time politically and economically than some other European countries since the British people voted last year to leave the European Union (Brexit vote). This has caused their currency, the pound to fall. It also caused business confidence to drop including because of the uncertainty about whether foreign firms would keep their main European offices in Britain and what this would do to England’s reputation as a major international financial center.

So now the British economy may at least be benefiting from the drop in the pound after the Brexit vote. This has made British exports relatively cheaper than the goods and services from the countries with currencies the pound has fallen in value against – including the euro. In fact, the data just in shows that Britain’s services sector in particular grew at a faster rate than the services sectors in the Eurozone countries.

https://uk.reuters.com/article/uk-britain-economy-pmi/uk-economy-peps-up-bolstering-boe-rate-hike-call-pmi-idUKKBN1D30SO

 https://www.nytimes.com/2017/11/02/business/britain-economy-rates.html