Take Your Time, Bank of England

(Bloomberg View) -- The Bank of England meets tomorrow to decide whether to raise interest rates. The choice isn't clear-cut, and the central bank's policy makers appear to be divided -- but with the economy showing signs of slowing and inflation under control, they'd be wise to wait a while longer before tightening.

The Bank of England responded to the Brexit referendum by cutting its benchmark rate to 0.25 percent and resuming its program of asset purchases. The economy initially proved more resilient than the Bank forecast. Inflation moved up too: It now stands at 2.6 percent, higher than the Bank's target of 2 percent. Hence the calls to reverse the stimulus.

Two of the current eight members of the monetary-policy committee voted in June to raise rates, and others are turning more hawkish. Andy Haldane, the Bank's chief economist, says he is leaning towards voting for a hike. Governor Mark Carney has been more cautious, but he too has hinted he's moving in that direction.

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.

--Editors: Ferdinando Giugliano, Clive Crook

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.

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