Ian King, Sky News Business Presenter

Barely a month ago, an interest rate rise next week from the Bank of England was a roaring cert. Today, you could stroll into any pub or bar in the City or Canary Wharf and offer odds of 2/1 against a rate rise next week, but would probably find few takers.

The lacklustre first estimate of GDP growth for the first three months of the year, published last Friday, was probably the final nail in the coffin for a May rate rise. Growth of just 0.1% was deeply disappointing, particularly given the accompanying commentary from the Office for National Statistics in which it said the slowdown could only to a small degree be blamed on the 'Beast from the East' March snowstorms.

The GDP data followed other evidence that will also have weakened the resolve of the Governor Mark Carney and his colleagues on the Monetary Policy Committee to raise the cost of borrowing. These include weaker-than-expected inflation data, a drop in consumer confidence, some weak retail sales figures, a drop in mortgage approvals and signs of a sluggish housing market.

Image: Keeping rates low leaves the Bank of England with little room for manoeuvre

Even before the GDP data was published, Mr Carney - having previously dropped broad hints that a May rate rise was on the cards - indicated he was having second thoughts, observing there would be "other meetings over the course of the year" when the MPC could consider raising rates.


That is a pity, for there are very good reasons why the MPC should raise the Bank rate next week.

The first is that the GDP data published last week was probably too pessimistic. The first estimate of GDP invariably involves a lot of guesswork, as the ONS only has about 45% of the relevant data at its disposal, with the number invariably being revised higher.

The most notorious example of this, in recent years, was in the first three months of 2012, when the ONS confidently declared Britain had slid back into recession, marking a 'double-dip'. That recession was eventually revised away when the ONS had more information.

On that occasion, the main reason to suspect the ONS had got it wrong lay in the Purchasing Managers' Index (PMI) survey data, which pointed to an economy growing more strongly than official figures suggested. The PMI data for the first three months of 2018 was certainly disappointing and pointed to a slowdown from the final three months of 2017 - but certainly suggested stronger growth than just 0.1%.

There is plenty of evidence to suggest households could withstand a rise in interest rates more easily than in the past.

Apart from in the construction sector, the latest PMI data for April published this week was disappointing in that it did not show more of a rebound from March, perhaps suggesting there was something in the ONS's suggestion that the weak first quarter can only be partly be blamed on the snow. But it still indicates growth in all parts of the economy.

Consider also the latest report from the Bank's network of regional agents, a piece of evidence on which the MPC relies heavily, published at the end of March. While there were certainly some disappointing indicators in the report, there were also encouraging ones, including a strengthening in business services turnover, growth in manufacturing exports, a rise in capacity utilisation among manufacturers and a pick-up in hiring intentions among employers in the business services sector.

Meanwhile, although inflation is falling, as Mr Carney and others on the MPC correctly said it would, once the temporary effects of the post-referendum drop in the pound had washed through the system, it remains above the Bank's target rate of 2%. It is likely to stay above it for the rest of the year.

At the same time, wages are now growing faster than inflation again, reflecting ongoing tightness in the labour market. In normal times, unemployment at a 42-year low, limited slack in the labour market and indications of rising wage inflation would be more than enough to persuade the MPC to raise the Bank rate.

Image: Wages are now growing faster than inflation again

Note that word 'normal'. The MPC needs to remember why it dropped so many hints previously about a May rate rise. These were based largely on the idea of 'policy normalisation', the notion it is now time to unwind some of the extraordinary monetary measures applied during the global financial crisis.

The US Federal Reserve has now raised its main policy rate six times since the end of the crisis while even the European Central Bank has recently hinted at an early end to its €2.3trn programme of asset purchases, or quantitative easing, in the jargon. The Bank has, to date, merely unwound the emergency rate cut put in place after the Brexit vote.

After the crisis, when there was a need to bring the deficit below the level to which it ballooned in Gordon Brown's final days in office, there was an implicit bargain between the Treasury and the Bank. Fiscal tightening from the former would be met by looser monetary policy from the latter. The same should now apply in reverse.

Opinion polls suggest the public has tired of austerity and the Chancellor has indicated he may have room to be more generous with public spending this year. If the Treasury is about to start loosening the purse strings, reflecting a return to more normal conditions, the Bank should be raising the cost of borrowing.

There is plenty of evidence to suggest households could withstand a rise in interest rates more easily than in the past.

As recently as five years ago, nearly three in four households had 'floating rate' mortgages, where the interest rate rose or fell in line with the Bank rate. Today, after years of locking into ultra-low home loan rates, barely two in five do. In other words, in the event of a rate hike, most households would see no rise in their borrowing costs.

Image: Since the recession, there have been just two quarters of negative growth

The biggest argument of all for an interest rate rise next week, though, is this: By July this year, the UK economy will be in its 10th year of consecutive growth, the last recession having ended in mid-2009.

Since emerging from recession, there have been just two quarters of negative growth, the second and fourth quarters of 2012 straddling that summer's glorious London Olympics. So, statistically speaking, the odds against another UK recession are shortening all the time.

When that day comes, the Bank will need to respond with measures to stimulate the economy. At present, with Bank rate close to its all-time low and the Bank's asset purchases standing at £435bn, Threadneedle Street will have absolutely no room for manoeuvre. Raising the Bank rate now will give it the ability to respond to harder times in future.

Sky Views is a new series of comment pieces by Sky News editors and correspondents, published daily.

Previously on Sky Views: Michelle Clifford - Is the EU holding democracy for ransom?