When will interest rates rise?

published 7 August 2014

The latest data suggest that the UK's economic recovery is gaining momentum. A survey of the services sector, which accounts for about 75% of the economy, reached an eight-month high in July. Housebuilding activity grew at the fastest rate since 2003.

House prices are rising at an annual rate of 10.2%, according to Halifax, the fastest pace since 2007. Sterling is a headwind for exporters, however, which helps explain subdued official figures for manufacturing growth in June.

What the commentators said

Research from Citigroup shows that UK companies' balance sheets are at their healthiest in at least 50 years. Their cash reserves, which in June rose at a rate not seen since 2007, are now worth a record 77.1% of the value of their bank debts, compared to 45% in 2008.

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Firms have already been loosening their purse strings. Now we can expect a corporate "spending spree", which will further bolster hiring.

With growth strengthening analysts are pencilling in a GDP increase of 3% in 2014 attention is turning to the timing of the first interest-rate hike. Larry Elliott in The Guardian highlighted an interesting feature of the services survey: "firms are reporting that they are starting to raise wages".

Official data has yet to pick up this trend. This week's services report "provides ammunition" to those who say "it is only a matter of time" before growth of 3% and sliding unemployment feed through to higher wages, and that "there is a danger of the bank falling behind the curve".

Quite right there is, said Andrew Sentance, a former rate-setter on the Bank of England's Monetary Policy Committee, in The Times. The basic point is that with growth of 3%, "the emergency conditions that prompted a reduction of the official bank rate to 0.5% have long passed".

So why are we waiting for the first hike? We are running out of spare capacity that could curb inflationary pressure. The British Chambers of Commence is reporting the highest number of companies working above normal capacity since its survey began in 1989.

There may be no inflationary pressure in the official data yet, but it probably won't be long in coming. Time to get on with it.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.