Andrew Sentance, senior economic adviser to PwC and a former member of the Bank’s Monetary Policy Committee, says Yes.
There is little indication that the UK labour market is softening. Employment has hit a new high on the data series which goes back to the early 1970s. Vacancies are significantly higher than before the financial crisis.
The rate of increase in total pay across the economy as a whole has strengthened to 3 per cent and in the private sector it is running at around 3.5 per cent.
In construction and retail/hotels/restaurants, pay growth is running at around 5 per cent. The unemployment rate continues to fall.
These are all indications that the economy continues to grow above trend and is operating close to capacity.
In this environment, employers will continue to bid up the wages of workers with key skills. Eventually that will feed through to higher inflation.
The MPC needs to make the first moves on interest rates before it is too late. Keeping them at the lowest level in recorded history in this environment – now we are in the seventh year of economic recovery – makes no sense. A rate rise is long overdue.
Ruth Miller, UK economist at Capital Economics, says No.
The latest labour market statistics confirmed that the jobs recovery is back on track after the dip in employment in the spring. But the easing in pay growth has further alleviated the pressure on the Bank of England’s MPC to raise rates.
Even if pay growth picks up again soon, this won’t necessarily push the committee into an early rate hike, if accompanied by a recovery in productivity – which we still expect to see.
What’s more, this week’s figures revealed that inflation returned to negative territory in September.
Although the renewed bout of deflation looks set to be short and sweet, the MPC may want to be sure that second-round effects on inflation expectations are not taking hold before tightening policy.
So while financial markets have probably gone too far in pushing back expectations for the first rate hike until the first quarter of 2017, a rise before the second quarter of 2016 still seems unlikely in our view.