Interest Rates May Rise Sooner Than Expected 
Interest rates may rise by a quarter of a point as early as November, according to predictions from the Ernst & Young ITEM club.

Going against popular opinion amongst analysts, Peter Spencer, ITEM's chief economic adviser, has said that, as long as European and US policymakers can allay sovereign debt concerns and calm the bond markets, "things should turn out OK".

The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury model of the UK economy and Mr Spencer used to be a Treasury adviser, so his prediction is a significant departure from recent thinking.

Until recently Mr Spencer has consistently argued that the Bank of England should "hold its nerve" and leave rates unchanged until there is compelling evidence that the country is coping with austerity.

His reasoning now is that inflation will start to fall in January and that there are signs of a stronger economic recovery. "The Bank has a window of opportunity to start to normalise rates in the New Year," he said.

"In January, VAT and last year's commodity price rises drop out. As inflation comes down, so does pressure on household budgets. So the Bank can raise rates without squeezing people too badly”, he added.

Inflation is currently running at 4.2 per cent but is expected to drop automatically to around 3 per cent at the start of 2012.

General opinion holds that the Bank needs to start "normalising" rates, which is generally interpreted as beginning the process of increasing them from the current historic low of 0.5 per cent back to around 5 per cent.

However, despite his surprise prediction, the ITEM club has concluded that the economy will grow by just 1.4 per cent this year, a lower revised estimate than the 1.8 per cent it predicted in April, as business confidence has been dented by Europe’s debt crisis.

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