The Bank of England is expected to reverse emergency action taken following the Brexit referendum, when it cut rates from 0.5 percent to 0.25 percent to avert a recession.
While a slump has not materialized, the British economy appears in worse health than most other major countries, with potential to be blown further off course by faltering talks to leave the EU.
The UK is growing at half the rate recorded in the US for the year to September, at 1.5 percent, while growth is expected to trail Italy, France and Germany next year.
WAGES FALL BEHIND
Stepping up the cost of borrowing would add to household costs such as mortgage payments and taking out personal loans, at a time when wage growth is failing to keep pace with inflation.
The cut to real earnings means that average pay is no higher than it was in February 2006, despite the economy being 4.4 percent bigger per person than at that time, the Resolution Foundation said.
Average earnings excluding bonuses increased by 2.1 percent in the three months to August, down from 2.2 percent in the three months to July after a revision to the earlier data, according to the latest figures.
That is despite the bargaining power of workers potentially being raised by the lowest level of unemployment since the mid-1970s.
However, that is only a fraction below the expectations of the central bank’s Monetary Policy Committee (MPC), which decides where to set the cost of borrowing — but it would need to be confident that wages can rise further in the coming months.
CAUTIOUS STEP
Although it will draw to a close the longest period in living memory without a rate rise — with the last in July 2007, when rates increased to 5.75 percent — economists expect this week’s increase to be modest and followed by few, if any, further rises over the coming year.
Bank of England Governor Mark Carney has also cautioned that this is likely to be his preferred course of action.
“Given that interest rates have not risen since 2007, the MPC may well sit tight for an extended period after an initial hike to see how consumers and businesses respond,” EY ITEM Club chief economic adviser Howard Archer said.
While increasing borrowing costs could hurt squeezed households, it will support the strength of the pound and help cut inflation, which reached 3 percent last month and is expected to rise further still, driven by the higher cost of importing food and fuel.
PROCYCLICAL
Economists at HSBC said they expect two rate rises from the bank, one on Thursday and one in May next year.
They said they estimate this could reduce annual average inflation to 2.5 percent from a previous forecast of 2.9 percent.
The bank’s preparations come as business investment has flatlined, with companies reluctant to spend because of fears over a hard Brexit.
Similar to families facing a higher cost of living, on the high street, companies have faced steeper prices for materials, eroding profitability.
Raising interest rates would remove support for firms from cheap loans, potentially compounding the problem.
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