The Bank of England’s Monetary Policy Committee (MPC) is widely expected to raise rates today by 0.25 per cent, reversing the cut shortly after the June 2016 EU referendum.
This would bring the level back to 0.5 per cent, where it had languished for nine years before the cut last August.
This will be the first rise in 10 years. But will we come to see this as the same type of mistake that Jean Claude Trichet made when, as president of the European Central Bank, he twice raised rates in the Eurozone in 2011, just as the region was falling back into recession.
Since the turn of the year, the UK has moved from the fastest to the slowest growing G7 economy, while the Eurozone is growing at the fastest rate since 2011.
Most forecasts for next year suggest a further slowdown, with the OECD expecting no more than one per cent growth, reflecting the negative impact of Brexit on investment.
So why a rise at all?
The pickup in inflation to three per cent, a good point above the Bank of England’s target of two per cent, will be used as a justification, as will the relative resilience of the UK economy so far after the shock Brexit vote.
But this level of inflation is more the result of the drop in the pound since the referendum than any domestic price pressures. Wage growth remain subdued at around two per cent, despite the emergence of skill shortages in a number of sectors, especially in manufacturing.
The irony is that, while the economy behaved better than was expected, this was to a considerable extent the result of Bank of England action.
Not only did it cut rates, but it also injected a huge amount of liquidity into the system, with an extra £60bn of purchases of government bonds in the secondary market, and some £10bn of eligible corporate bonds through an extension of the Quantitative Easing programme and special schemes to facilitate lending to firms .
This all provided significant help to firms to continue to grow and hire people, and encouraged households to borrow and spend, boosting economic activity.
In the process, household debt has risen to record levels – though as a percentage of GDP it remains below the peaks reached in 2008 before the financial crisis.
Of course, low interest rates and near record high employment levels have made both secured (e.g. mortgage) and unsecured (e.g. credit card) debt more affordable. But real disposable incomes are under pressure, reflecting a faster rise in prices than in wages.
That is beginning to affect consumers’ ability to spend on anything other than essentials. They are also likely to be hit by governor Mark Carney compelling banks to raise extra precautionary capital, while tightening rules on mortgages. At the same time, businesses confidence has remained fragile.
An 0.25 per cent increase may not make that much difference in itself, and if it happens the Bank will be at pains to emphasise that this is a correction rather than the beginning of a new upwards trend.
But there is a real risk that it will send a signal that the monetary stance is tightening and negatively affect perceptions at a time of increasing, rather than diminishing, Brexit uncertainty.