Merryn's Blog

How to tell when interest rates will start rising

If you want to know when interest rates will start rising, don't watch the inflation figures. Keep an eye on wages instead.

By now you are probably wondering exactly when interest rates will rise.

The Bank of England is supposed to keep the Consumer Price Index (CPI) knocking around 2%, so under normal circumstances you'd expect them to start raising interest rates as soon as it got anywhere near 3%. But these aren't normal circumstances.

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Right now, the Bank of England is much less worried about inflation than it is about consumer confidence, about the state of the big banks' balance sheets, and, of course, about house prices.

So even with the CPI at 3.3% and with the Retail Price Index (which we used to use as the definitive measure of inflation) at nearly 5%, it clearly has no intention whatsoever of tightening monetary policy.

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What might change that? The answer is rising wages. The Bank looks at the high level of unemployment (nearly 8%) and at the lowish level of wage rises around 2.3% on average at the moment and concludes that there is little risk of a dangerous wage price spiral kicking off any time soon. When that changes as it surely will they will change their tune.

So if you want to be ready for interest rate rises, don't watch the CPI. Watch the average weekly earnings index instead. And when it starts moving faster, get ready for a rate rise.

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