The Bank of England Monetary Policy Committee (MPC) held rates at 0.5 per cent yesterday for the 78th meeting in a row – no surprise about that.
Ian McCafferty remains the lone hawk voting for an immediate rise.
The rest of the Committee members are sticking to the line that we’ll need to wait at least until around the turn of the year for any first upward move in interest rates.
The spotlight now shifts to the US, where the Federal Reserve considers its interest rate decision next week.
Here, there is a much bigger chance of a rise in rates, as senior Fed officials have been hinting over the summer that September could see their first rate rise since the financial crisis.
But in the US too, there are some arguing for caution – focused on the outlook for China and recent financial market volatility.
Headline measures of growth and employment in the US look very positive.
The economy has entered its seventh year of an economic recovery which began in mid-2009.
GDP rose at an annualised rate of 3.7 per cent in the second quarter, with the US now leading the G7 growth league. Unemployment is down to 5.1 per cent of the workforce, just half the jobless rate seen at the depths of the recession.
Concerns about the international economy are one argument against raising rates, cited by the IMF and the World Bank. But there is an alternative view.
Some emerging market central bankers – including the distinguished governor of the Indian central bank Raghuram Rajan (a former IMF chief economist) – have warned that uncertainty about US rate rises is harming global growth by adding to volatility in financial markets. Postponing the first rate rise could add to this problem.
Aside from concerns about the international economy, there are two other main counter-arguments to a September rate rise.
The first is the low rate of headline inflation, which is just 0.2 per cent.
But if food and energy prices are excluded, the “core” rate is 1.8 per cent, not far below the 2 per cent medium-term target.
Also, with wage inflation picking up as the labour market tightens, it is likely that this “core” inflation measure will rise unless growth slows to some extent.
A second counter-argument concerns the increase in the number of people in the US labour force who are economically inactive – neither employed or unemployed.
Some economists argue that this is a “discouraged worker” effect – a form of hidden unemployment.
An alternative view is that demographic and other long-term structural factors are mainly responsible, and the fact that the number of inactive workers has not fallen as new jobs have been created supports this explanation.
But the fact that there is a balance of arguments could also mean that this is a good time to start to lift US rates off the floor.
If all the arguments were pointing very clearly in the same direction, it is likely that interest rates would need to move up quickly and sharply.
Waiting until this is the case, however, would mean that the Fed has got behind the curve and a gradual and slow increase is off the agenda.
In my view, the Fed should hold its nerve and raise interest rates this month – or in October at the latest.
Sometimes independent central bankers need to take decisions which are not universally popular. This is one of those occasions.