DEBATE: Now that the ONS has admitted it under-estimated labour costs, is it finally time for a rate rise?

The Recession Officially Continues And Is Now The Longest In UK History
It’s becoming increasingly popular to argue that cheap money is sowing the seeds for the next financial crisis (Source: Getty)

Now that the ONS has admitted it under-estimated labour costs, is it finally time for a rate rise?

Lee Hardman, currency analyst at MUFG, says YES.

While some caution is required, economic conditions in the UK signal that the time is nigh to begin raising rates. Both the UK and global economies appear relatively more “normal” than in recent years, and the full-scale of emergency easing that has been in place since the global financial crisis is no longer justified.

The UK economy has fared better than expected following the Brexit vote. Growth has slowed, but is still expanding roughly in line with estimates of potential. Consequently, there now appears to be little spare capacity left. The material upward revision by the ONS to unit labour cost growth will heighten Bank of England concerns that, without corrective action, the inflation overshoot will persist over the medium term.

There is, however, one crucial caveat to a gradual pace of tightening: securing a Brexit transitional agreement with the EU. Without such an arrangement to help smooth the Brexit adjustment, the Bank of England would quickly have to reassess their policy outlook.

Read more: A November Bank of England hike looks likely, but what comes after that?

Dr Victoria Bateman, lecturer and fellow in Economics at Gonville and Caius College, Cambridge, says NO.

On the face of it, there could not be a better time to raise rates.

We have the lowest unemployment rate since the 1970s, inflation is running well above target, unit labour costs have been revised upwards (to 2.4 per cent in the second quarter of 2017), and the pound is weaker. It’s been a decade since rates were increased, and never before in the Bank of England’s 300-year history have they been this low. (In the recovery from the Great Depression, the Bank rate was two per cent.)

It’s becoming increasingly popular to argue that cheap money is sowing the seeds for the next financial crisis.

But, against all of this, we face a veil of uncertainty never before seen in peacetime Britain. The contrast between the present and the future is stark, and the rate decision is indicative of the many impossible choices that Brexit is forcing us all to make.

The return to normality has, in effect, had the rug pulled out from under its feet. Whether rates are raised or not, the danger will be inescapable.

Read more: BoE official pushes for commitment to Brexit transition by Christmas

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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