Steady as you go

Now is not the time to raise rates, says Bank deputy

THE economy is getting stronger but it is not yet time to raise interest rates, the Bank of England’s deputy governor indicated yesterday.

“We do not yet have all the evidence. But the significant drop in activity in the UK in the first quarter of this year looks to have been largely an aberration, driven by poor weather,” said Sir Jon Cunliffe.

Retail sales are on the up, GDP growth appears to be improving and surveys suggest a recovery too.

“If this is confirmed, as I think probable, the overall picture is of an economy expanding around or a little above its potential rate of growth,” said the deputy governor.

A survey from Deloitte shows consumer confidence is up to its highest level in the index’s seven-year history.

Employment has continued growing this year despite worries over the state of the economy. Unemployment is down at 4.2pc, the lowest rate since the mid-seventies.

Wages have started growing faster than prices as inflation has eased back and companies are showing signs of responding to the skills shortage by paying more for new hires.

As a result consumers’ confidence in their disposable incomes has surged.

However, this is not yet enough to convince Sir Jon that rates need to rise. “Domestic inflation pressures, while strengthening a little are not yet established at levels consistent with inflation at target,” he said in a speech to businesses in Cumbria.

“Pay growth has established itself in the 2.5pc-3pc range. But the latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3pc territory in line with the May forecast. We may still be underestimating supply in the labour market,” he said.

This suggests next month’s crunch vote on rates at the Bank will be split and might not go the way of the growing band of “hawks” who want to raise the base rate from 0.5pc to 0.75pc.

Members of the Monetary Policy Committee (MPC) believe spare capacity in the economy is almost gone, meaning that even with economic growth at relatively low rates, by historic standards, inflation will pick up and interest rates should rise a little. But they are divided on the timings. Last month three policymakers – Ian Mccafferty, Michael Saunders and the Bank’s chief economist, Andy Haldane – voted for tighter monetary policy.

They were outvoted by the other six members. Growing evidence that the economy has recovered from the cold snap in the first quarter of the year could push more MPC members to vote for higher rates.

August’s meeting is Mr Mccafferty’s last, however, so support for higher rates could stumble into the autumn.