IT is many a year since economists, bankers and the markets pondered seriously every month, in advance of meetings of the Bank of England’s Monetary Policy Committee, whether a change in interest rates was justified and/or likely. Now those days have returned.

The evidence suggests that no change is likely when the MPC meets this coming week, but from now onwards the prospect of an interest rate hike will be up for genuine consideration and debate at each and every MPC session. As and when the first hike materialises, then the increase is set to be no more than one quarter of one percentage point, from 0.25 per cent to 0.5 per cent; superficially pretty trivial and simply reversing the minor reduction after the UK vote to leave the EU.

However, a decision to increase rates, especially one ahead of market expectations, could have wide repercussions. The story is further complicated with decisions to be taken on fiscal policy (should austerity be eased?) and while the real implications of Brexit are awaited.

The case for a rate increase is relatively clear. Inflation is above target and looks set to remain so for a number of months, as the impact of sterling’s substantial depreciation works its way through.

The MPC is instructed to set rates so as to keep inflation as close to target as feasible. Given the lags in the system, a rate rise in a month or two should help to bring inflation back towards target during the next year, especially if sterling strengthened as a result of a rate rise. Continued decisions to keep rates at their present ultra-low level could help to weaken sterling further, causing inflation to trend even higher.

There are also (understandable) concerns at the Bank of England that consumer credit is excessive and unsustainable. As inflation remains high, and above the increase in average earnings, so households may be tempted into further access to credit, enhancing the risk of damaging defaults in the fullness of time.

An early start to tightening monetary policy might place some heavily indebted households at risk. But at the same time a rate hike could temper excess borrowing and also cause lenders to adopt a more risk-averse stance – appropriate given all the continuing uncertainties.

However, starting to increase interest rates now would not be appropriate if our economy is set to slow sharply and fiscal policy is to remain set on ‘austerity’.

The overall outlook is uncertain at best. Recession in Scotland (defined as two successive quarters of negative growth) remains a distinct possibility (latest data due Wednesday). That is not the expectation at the UK level but a marked deceleration in growth is underway. Growth of GDP slowed to 0.2 per cent in the fourth quarter of last year, heavily dependent upon the consumer.

Perhaps investment will pick up as capacity constraints emerge in 2017. Perhaps export performance will improve as the benefits of sterling depreciation feed through to competitiveness in foreign markets.

But the overall expectation has to be sluggish growth through this year and into next. Any increase in interest rates would hinder the achievement of even that modest expectation.

Which leads on to the fiscal policy position; nobody can tell at this juncture whether austerity will be eased and higher public expenditure and real terms public sector pay increases permitted in the years ahead. A looser fiscal stance would boost growth, especially if that included real pay increases for key public sector workers, resulting in consumption growth being maintained.

It would be good to think that the Chancellor of the Exchequer and the Governor of the Bank of England are in regular contact debating the outlook for the economy and inflation and considering the best balance of monetary and fiscal policies in order to encourage sustained growth with limited upside inflation risks.

Dream on I hear you say! Decisions on the fiscal stance look set to be determined on political grounds, with Prime Minister and Chancellor viewing this critical policy decision from differing perspectives. Meantime the Governor must interpret the tea leaves on fiscal policy as best he can, and work with MPC colleagues to determine monetary policy based upon ‘reasonable expectations’ for the outlook for both the public finances and the economy as a whole.

And then there is the uncertainty that surrounds the Brexit negotiations. As Stephen Boyle said in the Herald a few days ago, “If the settlement we reach with the EU and the rest of the world maintains or enhances these [trade, international investment and migration] flows, we will be better off in future than we would have been. If not we won’t.”

The odds have to be very heavily weighted on the likelihood that the flows will be damaged rather than enhanced. So post-Brexit we are very highly likely to be worse off as an economy.

But does that, along with the damage due to continuing uncertainties, mean that the UK should risk higher inflation for an extended period to avoid the risk of recession as the true implications of Brexit emerge? This conundrum alongside the uncertainties on the fiscal stance demonstrates the complexity of the MPC debate and decisions in the months ahead. My synthetic fiver is on a small rate increase within the next three to four months, but I would risk no more than that!

Jeremy Peat is Visiting Professor at the University of Strathclyde International Public Policy Institute