“It’s going to be a tense start to 2011. The fiscal retrenchment will keep gross domestic product subdued, while commodity price rises and the VAT hike will push inflation close to 4 percent and leave the Monetary Policy Committee agonizing over whether to increase the Bank base rate,” Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said.
“However it’s vital that the MPC stands firm," Spencer added. In his opinion, the current inflationary pressures are temporary as domestic cost inflation remains low and consumer price inflation "will come back to heel in 2012 once the VAT increase falls out of the figures next January."
A premature increase in rates would strengthen the pound and the UK's ability to increase its exports, particularly to emerging markets, would weaken, he said.
“We are on a rocky road to redemption. It will undoubtedly be a tough year, particularly for employment, wages, housing and the high street, while many major uncertainties also remain around the actual impact of (UK Chancellor George) Osborne’s austerity measures,” he said.
“The growth in the UK economy all hinges on some major ‘ifs’ and ‘buts’ - the most significant of which, in the next 12 months, is going to be whether the MPC maintains the Bank base rate at 0.5 percent,” Spencer added.