Debate and speculation over when Bank of England will raise rates has started to loom as the UK recovery is becoming increasingly heated. With every fresh set of data and soundbites, the Bank looks as though it is edging closer to a decision, but meanwhile analysts and investors are not preparing for a decision anytime soon.
Minutes from the Bank of England's (BoE) Monetary Policy Committee earlier this month, published Wednesday, showed members are becoming "more balanced" about making a decision – a sign that they are more in favor of rising interest rates from the current record low of 0.5 percent.
The nine MPC members voted unanimously to keep interest rates on hold, as expected, but the minutes showed that policymakers continued to be divided on how much spare capacity there was in Britain's economy.
At the same time, fresh data showed U.K. retail sales spiked to a 10 year high on Wednesday, as food sales in the late Easter holiday significantly boosted the figure.
But UK portfolio manager at Pimco, Mike Amey said real policy rates, the growth rate of purchasing power when taking inflation into account, will "struggle to get much above 0 percent during this business cycle" because debt levels are still just too high.
"A lot of the debt that sat within the system 5 years ago has been reshuffled from the private sector to the public sector, so if you have high leverage still in the system it is going to be pretty tough to get an aggressive rate cycle any time soon and hold growth up," Amey told CNBC.
"Our core thesis is that if you look at neutral real rates, BoE real rates, to get above nought is going to be pretty tough," he said.
Economists and market forecasts have deliberated over whether the first rate rise will happen in summer 2015 or the fourth quarter, but recent predictions have suggested it might come as soon as March 2015 or towards the end of this year.
Outgoing deputy governor of the BoE, Charlie Bean also told an audience at the London School of Economics on Tuesday that a move to more normal levels will likely shock the market.
It is inevitable that at some stage market perceptions of uncertainty will revert to more normal levels. That is likely to be associated with falls in risky asset prices," said Bean, who retires next month after 14 years at the BoE.
"The bottom line is that we may yet encounter a few potholes on the way to the exit. But the good thing is that banks are better-capitalised now than in the run-in to the crisis, leverage is lower, there is better visibility of counterparty exposures, and we are better placed to deal with financial institutions that get into trouble," he said, speaking at the London School of Economics.
One area of particular concern that could push the BOE into raising rates is the runaway train that is the U.K. housing market. Britain's biggest mortgage lender announced its plans to cap its lending policy, targeting London's housing market over fears surging prices could "disrupt" the recovery.
Lloyd's banking group will restrict applications for mortgages of over £500,000 ($844, 507) to four times a borrower's salary, sparking speculation that other banks will follow.
"Whilst the housing market outside of London is starting to improve, the recovery is fragile and prices largely remain below their peak. It is important we don't disrupt this recovery," said group director of mortgages at Lloyds, Stephen Noakes.
"But in London, house prices are almost now 30 percent above the 2007 peak. This is largely driven by issues of supply which are particularly acute in London and this is having an impact on income multiples which are failing to keep pace with asset growth," he said.
Speaking on research published earlier this week that suggested one in ten mortgage borrowers are at risk of being "imprisoned" by unaffordable debts as interest rates rise over the next four years, Amey said it was "exactly the kind of thing he was talking about".
"The economy is just not able to with stand sharp rise in interest rates, when it comes it is going to be slow, and steady and it is not going to be particularly aggressive," he said.