Time to raise rates, but slooooowly!

The pace of the UK’s economic growth picked up steadily throughout last year, and while the overall annual growth rate was lower in 2017 than in 2016, the Bank of England is now hinting that it can begin to take away some of its support. The latest summing up of the UK economy in the Bank of England’s Inflation Report confirmed the expectation that rises in interest rates are on their way. While the Bank doesn’t believe that the economy is about to take off, it does think that the stronger global economy will help the UK and that should stimulate investment and help it to grow faster in future.

 

The trick is to make sure that we can achieve higher growth without higher inflation, which is already higher than target at 3%. The MPC has overlooked high inflation for several months, so why raise now? The difference is that unemployment has reached a trough.  The Bank believes that there’s not much slack left in the economy and further growth could lead to more inflation. So, it needs to keep some control but without stifling recovery.

 

With unemployment at such low rates, employers have to pay more to get workers. According to the Bank of England’s survey of companies, private sector employers are expecting pay settlements to be around 3.1 per cent in 2018, compared to 2.6 per cent in 2017. That’s good news for workers – and for the economy as there will be more money to spend. There is still a lot of catching up to do though, so households won’t feel suddenly rich. High inflation has been eroding their spending power for a long time.

 

When can we expect rates to rise? And how far will they go? We have been expecting a rise in May for some time and the markets now seem to agree (!) But the good news is that the pace of rate rises will be very slow, reaching just 1.5% by 2022.  That should certainly ensure that growth and recovery aren’t stifled.