Debate: Is the UK economy strong enough to withstand another interest rate rise in May?

The Governor Of The Bank Of England Arrives At Number Ten Downing Street
The Bank of England Governor is between a rock and a hard place. (Source: Getty)

Is the UK economy strong enough to withstand another interest rate rise in May?

YES - Tej Parikh is the senior economist at the Institute of Directors.

The Bank of England’s hawkish tone this month reflects its own judgement that the economy will be stronger this year, and be able to weather a rate rise.

Individuals are still starting and expanding businesses in elevated numbers, employment is at historic highs, and the weak currency is supporting a resurgence in manufacturing activity.

At the same time, an expected fall in inflation over the year will ease the squeeze being felt by households, which means high street sales should remain buoyant. The economy is now far more resilient, and less susceptible to a snap-back in interest rates.

While there are concerns about the high level of household debt, the cost of servicing that debt looks relatively low historically, which suggests any hit to borrowers won’t be overly significant – particularly if we’re expecting a modest 0.25 per cent increase.

More broadly, the banking system is better capitalised and less leveraged, which implies that credit conditions will continue to remain stable.

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

I don't envy the Bank of England Governor. He’s between a rock and a hard place.

On the face of it, the British economy looks strong enough to take a hike. Unemployment is low and we seem to be close to full capacity. However, the Bank of England is well aware of the Brexit downside risks to the economy.

While we’ve so far managed to survive on an almost two-year long barbecue of jingoism, which has served to limit any immediate contraction. Any economist knows that this cannot continue.

Irrational expectations will, once reality bites, become rational.

Hiking interest rates is surely the last thing the Bank of England really wants to be doing given what’s on the horizon.

But, they have no choice. Given the damage that Brexit will do (and is doing) to the economy’s supply-side capacity, demand must be brought in line. The problem is that when you're skating on thin ice, even seemingly small moves can be risky.

The wake-up call isn't far off.

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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