However, in its latest quarterly forecast, the Ernst & Young ITEM Club cautions that raising rates prematurely – before there is any reliable evidence that the corporate sector recovery is fully under way – could have disastrous consequences.
ITEM remains of the view that inflation will naturally ease next year, once the VAT hike and other temporary effects have passed out of the index.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said: "A rate rise would be perverse at this stage, merely adding to the already intense pressure on UK consumers, as well as increasing the RPI and risking a rise in wage settlements. Companies hold the key to UK growth, and a premature rate rise could easily break the key in the lock.”
He added: "Unlike the European Central Bank, the Bank of England hasn’t yet seen any core strength in the UK economy. Manufacturing seems to be performing well, but is too small to get us very far.
"Our forecast assumes that the MPC will keep interest rates on hold until November this year – when a revival should be evident. The economy will be much stronger next year as inflation falls back and the consumer begins to enjoy the recovery."
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