by Chris Becker

Is the Bank of England going to join the Federal Reserve and hike rates this evening, Australian time, when it meets for its monthly meeting?

As always with economics, there’s two hands to consider.

The bullhawks want Mark Carney to press the hike button. From The Telegraph:

former deputy governor Sir John Gieve said there was a “very strong case” for raising rates because the economic slump predicted in the wake of the EU referendum result had not materialised.

Ahead of the Bank’s decision, Sir John said uncertainty surrounding the UK’s future relationship with its biggest trading partner was likely to weigh on growth for the next few years.

However, the former deputy governor for financial stability said: “I don’t think in itself it should be causing the Bank to hold rates down to pump up demand.”

Sir John said: “I think there is a very strong case for reversing the quarter percentage point cut from last year. The rationale behind that was there was a risk that the shock of the vote would drive [demand] down excessively in the short term and the Bank tried to prevent that.

“Perhaps they did, perhaps it wasn’t necessary. But either way there hasn’t been a shock to demand.”

Erik Britton, director at Fathom and a former Bank of England economist, agreed that interest rates should rise.

“If not now, when? If we can’t do it when inflation is above target, when unemployment is at its ‘natural rate’ and when growth is reasonable, I don’t know when we’re going to do it,” he said.

While Fathom noted that most exporters had used the benefits from a weaker pound to boost their margins, he added: “That doesn’t imply there won’t be an increase in net exports because the increase in profitability of exporters should encourage expansion in those sectors.”

Sir Charlie said exports were “a natural area” for stronger growth following the drop in sterling’s value as the global economy continues to strengthen.

While he said it was “difficult” to see benefits in the coming months, he said the boost to exports was more likely to materialise when the UK’s trading relationships become clearer.

The Brexitdoves are saying hold! From Bloomberg:

On balance, though, the case for raising interest rates is still weak. Higher inflation reflects temporary factors, especially the steep depreciation of sterling after the referendum. The pound has since stabilized, which will keep the cost of imports in check. The Bank shouldn’t let short-lived fluctuations drive policy.

In addition, the economy no longer looks so healthy. Consumers are feeling the pinch from lower real wages, and business investment and exports aren’t taking over as strong drivers of growth. The economy expanded by just 0.3 percent in the three months to June, suggesting that a slowdown is setting in.

True, consumer borrowing is rising sharply, a sign that low rates could be fuelling a credit binge. But the Bank can deal with this in other ways: In June, it told lenders to set aside 11.4 billion pounds ($14.5 billion) in case some of these loans turn sour.

As Brexit approaches, uncertainty over Britain’s economic prospects is intense, and things could get worse before they get better. A change of policy now might have to be reversed in short order, adding to the problem.

Financial markets, according to a survey by Bloomberg, would see a rise in interest rates this week as a surprise — another reason for caution. For now the Bank’s best bet is to be patient.

Then there’s reality. Pound Sterling is zooming higher on the back of a weaker USD – if the BOE hikes, this could take it back to near Brexit levels at 1.38 or higher:

Which way for the BOE?