DEBATE: Should the Bank of England raise interest rates in August?

With recent data looking good, should the Bank of England raise interest rates in August?

Edward Smith, head of asset allocation research at Rathbones, says YES.

Central banks should demonstrate consistency. The more one changes its “reaction function” (as economists call it), the less it will be able to anchor inflation expectations. And given that the Old Lady of Threadneedle Street changes her mind more times than Argentina goes bankrupt, I want some dependability.

The Bank’s latest narrative makes sense. Echoing the Office for Budget Responsibility, and in line with our own modelling, it now estimates that the UK’s productive capacity can expand at an annualised rate of just 1.5 per cent a year. So if GDP growth (demand) comes in above that, it’s likely to be inflationary and will require a higher policy rate, even though growth of 1.5-2.0 per cent still seems weak.

Recent data suggests that growth in the second quarter could be a little north of 1.5 per cent, and that could continue into the third quarter. So let’s show some follow-through and hike. At the very least, it will give the Bank some (conventional) firepower if we crash out of the EU with nothing to show for it.

Richard Falkenhall, senior FX strategist at SEB, says NO.

Recent hints from the Bank of England suggest that it is about to deliver its second rate hike since 2007. It would probably take a serious political crisis or a complete collapse in Brexit negotiations to stop this decision.

But a rate hike in August is, if not a policy error, at least questionable. UK economic growth is not at all that strong, although the economy has recovered after stalling in the first quarter of 2018. While capacity in the labour market is mostly used up, wage growth has not at all reacted as in the past and appears to have eased again in recent months.

Inflation, which is mostly the result of previous sterling weakness, is already falling, and seems set to continue to end up below the inflation target by the end of this year. In fact, core inflation fell below the target to 1.9 per cent in June.

Moreover, the Brexit process creates a huge amount of uncertainty, which is bad for growth. If you ask me, there are several reasons why the Bank of England should be a little more patient and leave policy unchanged in August.

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