With real wages rising at the fastest pace since 2007, should interest rates rise now?

There has been strong UK wage growth in the three months to May (Source: Getty)

Guy Foster, group head of research at Brewin Dolphin, says Yes

Inflationary pressures are probably muted but there are four compelling reasons for raising interest rates as soon as possible. There is a growing generation of borrowers who do not know that variable interest rates can vary. The longer they remain unaware, the more risk there is that they will over-borrow.

As well as the risks for consumers, financial markets are also encouraged to take too much risk while rates stay low. Low interest rates mean low incomes for those approaching retirement, causing this fast growing demographic to save more and spend less – the opposite of what a low rate policy is supposed to achieve.

It is most important to follow the adage “go now, and go slow” – only raising rates at a pace which the consumer and markets can deal with. The nightmare scenario is that the Monetary Policy Committee (MPC) falls behind the curve and has to raise rates consecutively, with little opportunity to measure the reaction.

Samuel Tombs, UK economist at Capital Economics, says No

The acceleration in wage growth should not panic the MPC into raising interest rates right away, as there are now clear signs that productivity is also strengthening. While surveys suggest that GDP grew by a quarterly 0.8 per cent or so in the second quarter, yesterday’s labour market data also showed that employment fell by 0.2 per cent in the three months to May.

Accordingly, firms’ unit labour costs are still rising, only slowly. The MPC should wait and see whether three major risks crystallise. First, the danger that the UK’s spell of near-zero inflation – which looks set to last through 2015 – causes inflation expectations to shift down and so starts to adversely affect spending and investment.

Second, the risk that the reintensifying fiscal squeeze derails the recovery. Third, the danger that the recent Greek deal unravels, throwing the Eurozone back into crisis. It will be early next year before the MPC can be confident that these risks have passed.

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