It’s time to do the honourable thing and raise interest rates

Last year, Bank of England governor Mark Carney told us that when the unemployment rate got down to 7% the Bank would have a think about raising rates from the 300-year lows everyone is beginning to think are normal. It seems that's already happened the latest number came in at 7.1%.

Carney has had a think, and he has let it be known around Davos that rates aren't going anywhere. Apparently we are in a "different place" to where we were last summer, so the guidance given then is no longer relevant. Instead, we have to look at many, many other indicators to be sure the UK is at "escape velocity."

We are clearly being guided to think that forward guidance is about to be reguided (it's a good policy isn't it?) But to what? Back to inflation? That seems silly, given that it was only moved away from inflation a few months ago. And even when rates were supposed to move with inflation, they didn't.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

[cfsp key="opinion-poll-1"]

If you were Mark Carney, would you raise interest rates? When will that be? The thing is that wages could easily confound Carney just as much as the unemployment numbers have.

As Halkin's Peter Warburton points out, we now have something of a "runaway labour market". Yet earnings are barely rising at all bar in the wholesale, retailing, hotels and restaurant sector where they are up 3.1% (workers in these areas have seen their pay keep pace with inflation!). We still have a lot of people out of work - 2.3 million are counted as unemployed, and about the same as inactive but wanting a job', to say nothing of the two million who are long-term sick.

But nonetheless, "based on historical relationships recruitment hiring survey strength is consistent with annual pay growth of 5% not 1%." This is a "dam waiting to burst" and that makes it "the honourable duty of the Bank of England to raise Base Rate." We agree and we aren't the only ones. If you look at the strength of the pound you will see that the market has already priced a rise in.