DEBATE: Do murmurs of a rate hike imply signs of future recovery?

Do murmurs of a Bank of England interest rate rise imply signs of future recovery?

YES – Andrew Sentance, senior economic adviser to PwC and a former member of the Monetary Policy Committee.

While economic growth has slowed recently, the recovery has not gone away. It has just moved into a slower phase, as the economy digests the fall in the pound and the extra uncertainty created by the Brexit vote.

We are now into the ninth year of an economic expansion. Monetary policy must look one to two years ahead in terms of any interest rate decision. So the MPC should be thinking of how they respond to an economy which is still growing after 10 years of recovery in mid-2019 with very low unemployment and the prospect of restricted migration following Brexit. This combination could easily lead to a much more upward pressure on wages, which would sustain the recent pickup in inflation.

The strength of the global economy is also likely to support UK growth, so the economy can comfortably absorb gradually rising interest rates.

A rise in UK interest rates is long overdue, and the MPC now appear to be recognising that, albeit belatedly. Let’s hope they haven’t left it too late.

NO – Vicky Pryce is on the board of CEBR , a former government adviser, and co-author of It’s the Economy, Stupid (Biteback 2015).

The talk of higher rates has been based on hints that the Bank of England would soon have to act to stem the recent rise in inflation.

But price increases have come mainly from the drop in the value of the pound, following the referendum, rather than an uptick in the economy – which in the first six months of 2017 registered the slowest first half year growth in five years . Yes there are skills shortages emerging in some areas, particularly in manufacturing, but this has hardly been evident in wages overall which have been slow to respond to rising employment levels.

The expectation is that inflation will stabilise and start falling soon. And most economic forecasts predict slower growth in 2018 than whatever may turn out to be the case in 2017.

Any increase in rates, however small, would send wrong signals to both consumers and business, and could stop whatever nascent recovery one may have hoped for in its tracks.

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