When Will UK Interest Rates Rise Amid Surge in House Prices and Jobs?

The Bank of England's duty to either lower, keep or raise interest rates has become increasingly difficult over the last year as unemployment continues to fall, house prices continue to soar to record highs, while wages remain weak.

On 7 August, the BoE will decide whether it will hike interest rates or keep it at the same record low of 0.5% that it has done since 2007.

Why the Conundrum?

The BoE's governor Mark Carney initially placed heavy emphasis on the unemployment rate being a linchpin to when the bank will hike rates.

Effectively the assumption is, the lower unemployment, the more people will have in their pockets and therefore more cash goes back into the economy.

It is also assumed that more debts would be paid off and the more cash would be saved.

Unemployment has now fallen to a reasonable 6.5% but originally the BoE said it would eye a rate rise when joblessness fell to 7%.

Meanwhile, house prices have continued to soar past the boom and bust of 2007 and 2008.

In July, Halifax's monthly index said the average UK house price hit £186,322 (€235,028, $313,704) after jumping by 10.2% across the year.

So time for a rate rise? Not exactly. The headline figures may show that the UK economy is recovering strongly but underneath the unemployment and house price statistics, wages are weak.

Importance of Wages and Underemployment

Regular pay, which excludes bonuses, is growing at an annual rate of 0.7% – well below price inflation of 1.9%.

This means you get a lot less for your money because the goods and services you pay out of your wages are more expensive and your salary is not rising fast enough to match that.

Furthermore, the unemployment rate maybe low but the rise in the number registered as self-employed or under controversial zero hour contracts, are still in their millions.

This means that millions of people could be technically employed but earning less than a living wage week to week.

Furthermore, Halifax July figures show that the average price to buy a house in the UK now costs more than five times average earnings.

Using the Office for National Statistics (ONS) pay data, Halifax said the average house price is 5.02 times the annual earnings of a full-time male worker. This is up from 4.96 in June.

So, When Will Rates Rise?

UK economic growth is set to hit 3% this year and rates are set to start rising soon.

A Reuters' poll of 55 economists for the 7 August decision believe rates will be kept at 0.5%.

Overall, it's widely expected that the BoE to begin lifting its key rate by the first quarter of 2015.

On 23 July, the BoE have already hinted that rates won't rise this year after becoming concerned about the "surprisingly weak" wage growth in the UK economy.

Monetary Policy Committee (MPC) members said there are two possible explanations for this.

The first is it may be taking longer than expected for a tightening in the supply of labour to filter down to pay and that wages would pick up soon while the second is that the labour supply has actually increased, which is depressing pay.

Meanwhile, the Resolution Foundation released a shocking report that predicts that even the smallest of UK interest rate rises have the potential to double the number of households facing debt problems and create 'mortgage prisoners'.

The thinktank said in a report that even if the BoE raised rates, from the record low by a quarter of a percent, then by 2018, some 1.1 million households could be in "debt peril".

This compares to only with 600,000 households that are spending more than half of their post-tax income on repaying debt.

However, while a rate rise is unlikely for 2014, the BoE does not want the UK to become complacent.

At the end of last month, BoE's deputy governor Ben Broadbent made it clear that any changes to the level of interest rates will be "limited and gradual".

"The real message we're trying to get across is that for other reasons to do with what's going on in the global economy, investment, credit and risk premia, the level of interest rates that's likely to be necessary to meet our objectives and the gradient of our path to get there, are likely to be lower than the previous expansions," said Broadbent.

"It's very likely to be limited and gradual. [High household debt] It's one of the reasons for expecting why you might want to go more gradually. If you're more uncertain about the impact of a rate change you'd tend to go a little more gingerly."