There are many factors for the governor of the Bank of England, Mark Carney, and the rest of the Monetary Policy Committee to consider before they move interest rates upwards. The durability of the recovery, the frothiness of the housing market, the state of the budget deficit, the rate of inflation, and the condition of the world economy will all play a part in the decision.
But one issue might be more important than any other, and has so far been over-looked by the markets: the need to secure the Bank's reputation for independence and to make sure that it is not in any way seen to be trying to influence the result of the elections.
In practice, that means that if the Bank is going to raise rates, it needs to do so in January or February of next year at the latest, or else postpone it until 2016. Anything else will look like meddling in electoral politics.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
When the Bank finally shifts rates upwards, it's going to be a big deal.They have been stuck at a 300-year low of 0.5% for more than five years. The last time the Bank increased interest rates was in July 2007, when it pushed them up to what now seems like a punishing level of 5.75%.
It is now seven years since rates went up, and may well be eight before the move is finally made. It's possible that the banks and building societies no longer have the systems in place to implement a rate rise after all, it is a long time since they've had to use them. Most City economists have pencilled in 2015 for that first rise.
The economy is expanding again, house prices are looking frothy, jobs are being created, and even wages are starting to increase. If that is not the right time to start edging rates back towards normal, it is hard to know when is.
There is one snag, however. Under the new system of fixed-term parliaments, May 2015 is also the date of the next election. Carney has been keen to make it clear that the timing of the election will have nothing to do with the decision.
"We are absolutely clear that it will happen independently of the political cycle," he said in an interview with The Northern Echo last week. The trouble is, that is not how it is going to work out. The election will be a factor, whether Carney likes it or not.
Imagine what will happen if the Bank increases rates in March, April, or indeed May of next year. With all the political parties in full electioneering mode, millions of home-owners and small businesses, not to mention people who owe too much on their credit cards, will start to see a sharp increase in their monthly payments.
The average debt of British households is coming down, but it is still at crushing levels 140% of GDP, according to research by Citigroup. According to the Office for Budget Responsibility, 1.1 million households are in what it describes as "debt peril" by which it means they won't be able to cope if rates rise to 3%.
If rates were at 5%, two million families will be spending more than half their income on debt repayment. And that is at the extremes. There will be many more families who will be able to manage higher repayments, but only by cutting down on their other spending and that is going to hurt.
Even worse, the froth will immediately get blown off the top of the housing market. That may well be a good thing, since parts of the market look dangerously over-heated, but if prices stall or start to drop, it's going to be hard on the people who have just spent all their savings and leveraged themselves to the hilt to get their first step on the property ladder. None of those people are going to be feeling good about the government in charge at the time.
Of course, George Osborne will no doubt argue a rate hike is to be welcomed. A rise in interest rates should be seen as a sign that the economy is getting back to normal, he will tell everyone. It will be a vindication of the coalition's economic policies.
In fairness, he might well have a point. But it is not exactly going to play well with the people who have just had a letter from their mortgage company telling them their repayments are going up by a couple of hundred pounds a month.
The truth is, a rate hike in the months leading up to an election that is certain to be a very close call might well cost the Tories victory. And the Bank would be to blame and might well be seen as having helped the Labour Party.
But then imagine it the other way around. The Bank sits on its hands and then decides to raise interest rates in June or July. It will hardly be a popular move for either the Labour or Tory government that will be in power by then. But much worse, it will look as if the Bank delayed a rate rise to help the Tories going into the election and then it will be blamed by the Labour Party.
Essentially, it is a lose/lose situation.The Bank can't raise rates three months on either side of the May election without being seen to have influenced its outcome. And if it does that, it will have damaged its reputation for political independence.
The upshot? In effect, the Bank has until January or February next year to raise rates. And if it has not done so by then, we can forget about a rate rise until the autumn of next year at the earliest.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
In the doghouse: hundreds of investment funds are underperforming - is it time to sell?
News The latest Spot The Dog research from Bestinvest reveals 151 funds are failing to beat their benchmark. We reveal the worst performers
By Marc Shoffman Published
Nationwide: House prices creep up for the first time in over a year
Nationwide’s latest house price index reveals property prices are finally rising. Will this pattern continue in 2024?
By Vaishali Varu Published