Q: As inflation reaches 2.7 per cent: Should the Bank of England raise the base interest rate this year?
YES – Andrew Sentance, senior economic adviser to PwC, and a former member of the Bank of England’s Monetary Policy.
The Bank of England has missed many good opportunities over the past few years to start the process of bringing interest rates back to a more normal level. From 2013 to 2016, the UK economy grew well and unemployment fell steadily. Inflation was low, but the Monetary Policy Committee (MPC) can look through short-term fluctuations in inflation. The longer the MPC leaves its official Bank Rate at the current super-low level, the more difficult it becomes to make the first move. We are now nearly a decade on from the first tremors of the global financial crisis. Interest rates have been too low for too long and the process of returning them to normal has to start some time. We shouldn’t be waiting longer for the ideal moment to start on the path of rate rises. Unemployment is low and the economy continues to grow, even though there has been a slowdown. Inflation is high and rising. A bolder strategy of raising interest rates would shore up the value of the pound, and limit the damage from higher inflation. Why are we still waiting?
NO – Adrian Lowcock, investment director at Architas.
The recent rise in inflation has been driven by temporary factors, such as a rise in oil prices and a fall in the pound, which will drop out of the equation in due course.
It is the longer-term inflationary trend that the Bank of England needs to be concerned about. Technology is having a long-term deflationary effect on developed economies, while wage inflation has been low and not kept up with the recent rise in inflation – which means household incomes have been falling. Raising interest rates in this environment would just add to consumers’ woes, pushing up their borrowing costs at just the wrong time. We need a confident consumer as Brexit negotiations begin. Few are able to predict with any certainty the impact Brexit will have on the economy, but it would be more prudent to wait to see how things develop. The bank can always raise rates later if inflation proves more persistent and the economy more resilient.