Roll up, roll up: there's a new game in town. It may not have a snappy title, but it's likely to be the most important decision for anyone betting for or against the U.K. economy in the next couple of years.
When will the Bank of England's Monetary Policy Committee (MPC) start raising interest rates?
The minutes from this month's meeting of the MPC were much more closely watched than previous months, particularly after recent comments from governor Mark Carney and MPC member David Miles. Miles, who is one of the more dovish members of the committee, indicated he would vote for an interest rate rise before his term on the MPC ends (in May) – while Carney said that the rise "could happen sooner than markets currently expect."
This was reinforced by the MPC stating that the "relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising."
After seven years without raising interest rates, the BoE is now widely expected to be one of the first central banks in the Western world to raise rates, after years of historically low rates in Europe, the U.S. and U.K. following the credit crisis. As such, it is likely to give other central banks a preview of how consumers and the credit markets will react.
"The Fed can look to the U.K. as the canary in the coalmine," strategists at UBS wrote in a research note.
In previous U.K. economic cycles, raising interest rates has been followed by slight dips in stock market performance, then a gradual rise upwards.
A growing number of traders are now betting that the first rate rise will come this year rather than early 2015, which most economists had previously forecast. Yields on U.K. short term debt have since risen above those of some euro zone countries as a result.
"The "Goldilocks" economy was where growth wasn't too fast to engender rate hikes, nor too slow to cause disappointing growth. In the U.K. the porridge is now getting too hot," according to UBS strategists.
Some City economists have moved their predictions for the first interest rate rise to as early as November (UBS), and Credit Suisse warned "the risks of the MPC going sooner than expected – say, in August – are greater than them tightening faster than expected."
Yet these predictions may yet turn out to be wrong.
Growth and employment data have both been better than expected, since Carney took over as Governor less than a year ago. However, average earnings, which rose by just 0.7 percent last month, are still rising slower than inflation in consumer goods, at 1.5 percent. There are concerns that raising rates will further raise the cost of living, at a point when wages are already rising too slowly.
The relative strength of sterling at the moment is expected to hit earnings – around three-quarters of revenues at FTSE 100 companies come from outside the U.K.
There are also increasing concerns about the imbalanced recovery of the U.K. housing market, with London and the South-East house price rises continuing to outstrip the rest of the country. Overall, house prices rose by 9.9 percent in the month of April, according to official data, which will continue to penalize first-time buyers. Interest rate rises are a classic method of cooling housing market activity, although other measures, such as limiting the loan-to-value ratio banks can lend, or ramping up the pace of housebuilding, are also being suggested.
The composition of the MPC is also a possible fly in the interest rate rise ointment. The departure of Charles Bean and Paul Fisher, and the addition of Kristin Forbes and Nemat Shafik, will mean that there are more Carney appointees on the MPC, but that doesn't necessarily mean consensus.
- By CNBC's Catherine Boyle