The Bank of England will defy expectations and raise interest rates next year on the back of a solid recovery and rising inflation, senior economists have warned.
Although still in the minority, a handful of leading experts believe the Bank will come under pressure to raise rates towards the end of 2013 18 months earlier than markets are predicting.
Simon Ward, chief UK economist at Henderson Global Investors, said rates will rise from their current record low of 0.5pc to 1pc in the second half of the year.
Andrew Lilico, at Europe Economics, said he hopes “we finally get a rise”, and Andrew Sentance, a former member of the Monetary Policy Committee, said that inflation should be brought more firmly under control and interest rate rises should be “on the agenda”.
Mr Ward has a track record of correctly predicting interest rate increases, even when it is against consensus opinion. In January 2007, he was the only one of 50 economists who successfully predicted the Bank would lift rates from 5pc to 5.25pc.
More recently, in June, he said the Bank would restart quantitative easing. That month, the vote narrowly went against more QE, but an extra £50bn was announced in July.
Asked via email for his prediction for interest rates for the end of 2013, Mr Ward said 1pc.
A rate rise would be likely to hurt mortgage holders, many of whom are on variable-rate deals that would suffer an immediate increase in costs. According to Financial Services Authority data, 72pc of mortgages are currently on variable rates, compared with just 47pc in 2007.
A recent survey for the Bank by NMG Consulting found that more than 40pc of households are concerned about debt levels and more than a fifth are struggling to make repayments, even with interest rates at historic lows of 0.5pc.
Despite his rate rise forecast, Mr Ward said the housing market would improve next year due to an increase in mortgage availability helped by the Bank’s Funding for Lending scheme . Prices will rally 3pc, he said, in line with inflation. In real terms, that would mean house prices stagnating.
Inflation will remain stubbornly high, as a result of escalating food and energy prices, and the Governor will have to write another letter of explanation to the Chancellor, Mr Ward said. He expects better growth than the official 1.2pc forecast in 2013, predicting a 2pc rise as consumer spending, business investment and exports all improve.
Mr Lilico was less optimistic about house prices next year, forecasting a 5pc fall “in real terms” after inflation. And, although he said a rate rise would be necessary, he was not convinced the Bank will follow through. “Let’s hope we do finally get a rise, but it’s not guaranteed,” he said. “They seem to have abandoned all orthodox theory about interest rate setting.”
Interest rate policy could change dramatically next year after Mark Carney takes over as Governor at the Bank , Mr Ward warned.
Mr Sentance writes in the Sunday Telegraph: “If inflation remains stubbornly high, as I expect, action to gradually raise interest rates and withdraw monetary stimulus should be on the MPC (KOSDAQ: 050540.KQ - news) agenda next year.
“This would help curb some of the underlying sources of our inflation problem supporting the pound and giving a clearer signal to businesses that their ability to pass through price increases will be limited.”
Danny Gabay, at Fathom Consulting, expects the Government to change the 2pc inflation target to a dual mandate or nominal GDP target.
To make a big statement about growth, he expects Mr Carney to vote to cut rates to 0.25pc and add another £200bn of QE.