Should the Bank of England raise interest rates next month in light of the uptick in GDP growth?
Andrew Sentance, senior economic adviser to PwC and former member of the Monetary Policy Committee, says YES.
A quarter point rise in the official Bank rate would only take the level of UK interest rates back to where it was from 2009 to 2016. With hindsight, it was a mistake for the MPC to cut rates last summer, and a rise in November would only reverse this mistimed cut.
The idea that a slow rise in interest rates – from their currently extremely low level – will derail our economic recovery is totally misplaced. That hasn’t happened in the US, where rates have been rising gradually.
There are a number of ways in which higher rates could be supportive of growth – for example, by supporting sterling which would ease the squeeze on consumers from imported inflation. Savers would also benefit from higher interest rates, offsetting any drag on spending as a result of a small rise in borrowing costs.
The MPC should see a rise in interest rates as the beginning of a return to some degree of normality, and should not delay any further.
Suren Thiru, head of economics at the British Chambers of Commerce, says NO.
While the slight uptick in GDP growth in Q3 was welcome, it is the longer term trends that matter most – and they suggest that the UK remains locked onto a low-growth trajectory.
Indeed, UK’s combined economic growth performance over the first nine months of 2017 was the weakest in five years.
Significantly, the longer term outlook is looking rather challenging, with UK economic growth likely to slow sharply next year, weighed down by weaker consumer spending and sluggish business activity.
Against this backdrop, it is vital that the MPC provides monetary stability, particularly with little evidence that the current spike in inflation is anything other than temporary. A decision to raise rates next month would be ill-timed, and could risk both consumer and business confidence and weaken overall UK growth.
While interest rates have to rise at some point, it must be done slowly and timed so as not to damage the UK’s growth prospects.