When should rates rise?

published 21 November 2014

The annual rate of UK consumer price inflation (CPI) ticked up to 1.3% in October, a 0.1 percentage point increase from September. The rise was blamed on higher prices for computer games as Christmas approaches.

Following last week's quarterly Inflation Report by the Bank of England, which struck a dovish tone, markets expect interest rates to remain at 0.5% until late 2015.

What the commentators said

The latest inflation figure is likely to be "a blip in a downtrend", said Larry Elliott in The Guardian. The fall in the oil price is feeding through to garage forecourts. Lower commodity prices are giving manufacturers a boost: input prices have fallen 8% over the past year.

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The "intense supermarket price war" is good news for consumers, while the mild weather has prompted desperate retailers to cut prices to shift their hitherto largely untouched winter collections.

The slowdown in the global economy, and the more gradual slackening in the UK's growth rate, also points to disinflationary trends.

In addition to all this, the prices charged by utility companies for services such as gas and electricity are set to stay on hold, noted Robert Wood of investment bank Berenberg. The upshot is that CPI should be down to 1% by December.

That means real incomes are set to rise, providing "timely support" for consumer spending and hence for the recovery, said Capital Economics. Worries about the eurozone aren't going to dissipate quickly, though, and inflation looks set to remain weak in 2015.

All this means "it's hard to see" the Monetary Policy Committee (MPC) of the Bank of England voting to raise interest rates any time soon. Nonetheless, they might not wait until late next year as the markets expect. Wages are on the up and the Bank has previously raised rates with inflation below target.

The sooner rates rise, the better, said former MPC member Andrew Sentance in The Times. The global economy is sluggish, but on balance no worse than at any point in the years since the crisis. Labour market slack is dwindling rapidly.

The Bank says it wants to ensure it raises rates gradually, and it's best to start when inflation "is not a clear and present danger". If it waits until wage and price pressures "are seriously building up", it will have to raise them more rapidly. That raises the threat of a "shock" to our still indebted borrowers, which could derail the recovery.

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.