Will the Bank of England raise interest rates sooner rather than later?
That debate has once again picked up some steam on the back of strong GDP data coming out of the U.K. last week that showed a greater-than-expected improvement across all sectors of the British economy. The 0.8% growth figure recorded for the third quarter is also, in fact, the British economy’s best quarterly performance since 2010. “If the economy keeps growing as it has in the third quarter, we’d have what would be sustained growth in the fourth quarter,” said Charles Davis, head of macroeconomics at the Center for Economics and Business Research in London. More importantly, that means that “you’d be looking at the unemployment rate falling quicker than what was forecast in August,” he said, and perhaps even coming close to the stated 7% limit that would lead the Old Lady of Threadneedle Street, as the central bank is fondly known, to change the course of interest rates.
“Since August, we have seen a sustained improvement in the data, so you would think that in light of this, the Bank of England would revise their view on rates,” Davis said.
The U.K.’s Central Bank has said it would maintain interest rates where they are until the country’s employment rate falls to 7%, unless inflation becomes a major problem, and it has stated it expects this to happen in 2016.
The question now is whether the current strong state of the economy and the fact that unemployment, which is now at around 7.7%, is decreasing faster than expected and will lead to an increase in interest rates. The U.K’s Central Bank will weigh in on inflation, currently at around 2.7%, in early November and some believe there may be a shift with respect to interest rates as well.
But Bank of England Governor Mark Carney was also the first to warn about the dangers of getting too excited about the future prospects of the British economy. Although the third quarter GDP figures are encouraging, Carney said that they are coming from an extremely low base and even if unemployment has fallen and will continue to fall, it’s too early to get too excited, since the U.K. economy still faces numerous challenges, not least the recovery of the broader Eurozone.