It is a strange time to raise interest rates. The Bank of England normally acts when the growth is strong, inflation rising and the economy at risk of overheating.

But so far this year only one of those has applied – price rises hit 3pc in the past year and are set to rise a little further.

Nonetheless, Mark Carney and his colleagues are set to raise their base rate from 0.25pc to 0.5pc in next week’s Monetary Policy Committee meeting.

This is an historic move, the first rate rise since 2007. Officials have given very strong signals in recent weeks that they will raise rates barring any sudden slump, and the latest growth data will not throw policymakers off track.

They were preparing to hike rates with growth of 0.3pc in the third quarter, so the expansion of 0.4pc will support the case to tighten monetary policy.

The stronger growth rate will prompt further analysis of the state of the economy, too.

Could this be a sign that the UK economy has turned a corner and is on the way up? Or is it merely a small move around a new miserable trend rate of growth?

It is possible that the worst is now over. The fall in the pound and the subsequent surge in inflation should be nearing its end by now.

Wage growth is showing hints of a recovery, and economists hope pay packets will start to outpace prices next year.

If so, it could be an opportune time indeed to raise interest rates.

Ruth Gregory at Capital Economics says: “In contrast to the consensus expectation of a further slowdown in growth, we still think that there is scope for the economy to pick up a bit more pace next year.”

“With inflation likely to fall in 2018, the worst of the real pay squeeze should soon be behind us. And sterling’s decline, along with robust global growth, should boost net trade over the coming quarters.”

She expects growth to rise to 2pc next year, up from 1.5pc in the past 12 months.

One cause of concern was the failure of the manufacturing sector to match strong surveys, or to boost exports in response to the strong pound.

But that seems to be changing too, as the industry’s output grew by 1pc in the quarter.

Economist Kallum Pickering at Berenberg Bank is not quite so optimistic, but still expects growth of 1.6pc in 2018 and 1.7pc in 2019, above the average forecast.

As a result, he thinks the Bank of England is making the right move.

“Is the Bank making a mistake by going for a rate hike? No. Even though real GDP growth has slowed a little this year compared to 2016, because of Brexit, firms are not supplying goods and services quickly enough to meet the growing demand,” he says.

“As a result, underlying inflation is rising. Without modestly tighter monetary policy to keep inflation expectations firmly anchored at the 2pc target, underlying inflation would continue to rise and the Bank would have to raise rates by more at a later date which would risk choking off the expansion. It is far safer for the Bank of England to go early and slowly than later and faster.”

Such a modest rate hike will only have “trivial” effects on growth, he believes, and so “will not do much to thwart a continued gradual pickup in wages and productivity toward their long-term trend rates”.

However, there remain reasons for caution.

The new growth figure of 0.4pc remains only a modest improvement in GDP, which is below the quarterly average growth rate from any year since 2012.

Other analysts are more sceptical of the case for a rate rise.

Historically the Bank of England has raised rates when the economy is growing at around 0.7pc, so it would be highly unusual to hike now.

Suren Thiru, head of economics at the British Chambers of Commerce, fears that such a move will dent growth when the economy is already vulnerable, and counteract any efforts by the Government to boost the economy.

“We would urge the MPC to proceed with caution on raising rates, as tightening monetary policy amid the current economic and political uncertainty could weaken growth,” he says.

“Crucially, the focus of next month’s budget must be on supporting business growth, including addressing the escalating burden of up-front business costs.”

He is likely to be disappointed – analysts at Morgan Stanley have hiked their estimated chance of a rate rise to 80pc, following the publication of the GDP number.

That raises the question of what happens next. Markets believe there will be another rate rise in May 2018, putting the UK on track for one hike every six months, gradually returning to more “normal” levels.

If the economy is indeed on track for a recovery, then this could well be the path facing the UK. Ultra-low borrowing costs could, very slowly, come to an end.

But it is not guaranteed. In particular, political chaos remains a serious threat.

James Smith, an economist at ING, says: “Whilst it looks more likely that the Brexit talks can move to the next stage after December, there is still plenty of political uncertainty for firms to contend with as we head into 2018.

“So whilst we expect the Bank of England to increase interest rates next week, the sluggish growth outlook will weigh heavily on the Bank’s decision-making process when it comes to further tightening next year.”

 

 

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