A good question. Let's start with what every student of monetary economics learns in an introductory course. If the economy falls into a recession, the central bank cuts interest rates. Credit is thus cheaper and fixed-income instruments yield less, which prompts the private sector to borrow more, invest more and consume more. The economic growth is thereby rescued and the economy can go ahead—until the point where it gets overheated. To avoid the risk of inflation, the central bank in its infinite wisdom would raise interest rates. Higher rates would steer the economy back to the normal pace of growth, which is close to its potential or long term trend. Low inflation is kept at all times, excessive ups and downs are trimmed. Everybody's happy.
So much for the theory, which works, alas, in textbooks only. Now this is how it works in practice:
If the economy falls into a recession, the central bank cuts interest rates. Now, fast forward to the overheated economy. In theory, the central bank should raise rates to rein in inflation. In fact, most central banks failed to have done that in 2006-2007 when it was necessary. The reasons may vary, but one comes to the foreground. Whether in the US, UK or in the eurozone, central banks have used rigged inflation measures. The consumer prices indices (CPI) have omitted investments: property in particular. Why? Because property is classified as investment rather than goods of final consumption. That's why it doesn't enter the CPI.
Therefore, just because of an arbitrary definition, property has been largely ignored. It was possible that many economies (USA, Spain, Ireland come to mind) developed huge property bubbles without having moved the CPI by an inch upwards.
When the bubbles burst in the US, in Spain or in Ireland, economists and central bankers were perplexed: What has happened? We've done everything correctly, according to the state-of-the-art textbooks—so why the crisis now?!
The textbooks have failed to mention that credit inflation—the growth of credit, which is a different measure of inflation—may play an important role. If there is too much debt, a lot of bad debt may occur as soon as the economy slightly deteriorates. This may bring about a banking crisis.
And so it happened in 2008. Central bankers were baffled, and resorted to another textbook rule: when recession comes, cut interest rates. They did it, and over time, the economy has indeed improved. Is it the right time to hike interest rates again now?
According to the theory, yes. However, there's a glitch. The British economy bears a huge debt burden. According to McKinsey, the total British debt stood at more than five times of GDP in 2011 and probably hasn't changed much since then. (You might have thought that Greece has a lot of debt, but look at Britain...)
Despite her debt burden, Britain remains solvent. There is a risk, however. If the Bank of England raised rates too much now, the debt burden could get substantially heavier for certain debtors (those who pay variable rates.) On the other hand, market prices of bonds with fixed rates always fall when rates go up. Thus, balances of many financial institutions—banks and pension funds in particular—might take a beating. This must not happen!
Higher rates may be adequate, but the BoE might make a lot of damage to the economy if it went forward too boldly. Rather, it's likely that the central bank would wait and hope that inflation would calm down on its own.
Hence the growth may be roaring ahead and the interest rates may be kept low. As Mark Carney said today: the Bank of England may need to hold rates for some time.