great wall

Following the decision by the US Federal Reserve to increase interest rates yesterday, China has now followed suit. Is this a start of a trend?

Coincidence? The US is the biggest economy in the world, China the second biggest. Within roughly 12 hours of each other, central banks in both countries have increased interest rates.

These days, the world feels like a small place. What happens in one part of the world affects other parts. Interest rates influence global flows of money: when rates go up in the US, but stay put across the rest of the world, money flows into the US - at least in theory.

Over the last 15 months, US interest rates have gone up three times, the most recent occasion being March 15th. But over that time frame, UK rates have been cut, while in the Eurozone, the central bank -ECB- has been applying quantitative easing like there was no tomorrow.

They call it divergence. Monetary policy in the US has appeared to be heading in the opposite direction to monetary policy in the UK and Euroarea.

But how long can this last? The president of the ECB, Mario Draghi has been claiming victory in the fight against deflation, and with German inflation rising, it is surely only a matter of time before Germany's central bank hawks start pressing the ECB to tighten monetary policy, although it is far from certain they will get their way for some time.

In the UK, the Bank of England lost its main hawk this week, when its Deputy Governor, and erstwhile potential successor to Mark Carney as Governor, Charlotte Hogg, was forced to resign. Ms Hogg was the one leading light at the UK's central bank who had suggested that interest rates might have to rise soon.

But in China, interest rates have increased from 2.25 per cent to 2.45 per cent.

Was China's central bank motivated by the Fed's own decision? Julian Evans-Pritchard China Economist at Capital Economics, has his doubts. He said: "The timing of today’s move, along with the mention of Fed rate hikes in the PBOC’s [China's centrall bank] accompanying statement, suggests that the PBOC may have been partly motivated by a desire to follow the Fed in order to avoid additional downward pressure on the renminbi. That said, we think it would be wrong to characterize today’s move as simply a response to the Fed. In its statement, the PBOC also pointed to stronger domestic growth, higher inflation, rapid credit growth and an overheating housing market in some cities as factors behind its move to push up interbank rates. We think these domestic concerns would have led the PBOC to raise rates anyway, even if the Fed had remained on hold. Indeed, we were expecting a second PBOC hike this quarter long before the markets began pricing in a March Fed hike."

All the same, when interest rates rise in the two biggest economies in the world within 12 hours of each other, you know something is up.

The era of record low rates in the UK and Eurozone is not over yet, but it is drawing to an end.

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