After a hearty festive season, the last thing that people want is to be told to tighten their belts. Nevertheless, the Bank of England may respond to a strong retail season by raising interest rates in the new year.

Financial markets and a minority of City economists are predicting that the Bank may put up rates to 5.25 per cent in February, particularly if consumer spending in the crucial month of December turns out to have been more vigorous than expected.

While it will be some weeks before the fog clears on the data from the high street, other parts of the economy are already causing concern, particularly to the panel of experts that makes up The Times Monetary Policy Committee (MPC).

Most members of the panel expect rates to start with the number 5 for the whole of 2007 as inflation continues to be above target in the months ahead.

Sir Alan Budd, a former member of the Bank of England’s MPC, said: “The interest rate will be 5 per cent at the end of the year. This may happen because rates are unchanged throughout, or it may happen because they are raised by a quarter-point and then cut later in the year.” If the eurozone continued to grow robustly and America picked up, a rate rise was likely, he said.

Martin Weale, director of the National Institute for Economic and Social Research, said that rates of between 5 and 6 per cent were normal for the UK. “Once rates are in the normal range, rises are as likely as falls, so obviously rates could rise further,” he said.

His forecast is that rates will increase a quarter-point in February, then stay level for the rest of the year.

The Bank is in an uncertain mood. After a split decision to raise rates in November, its MPC voted unanimously to keep them on hold in December, but the minutes showed that members were divided on the balance of risks to inflation.

There are several pointers to higher rates. Consumer price inflation was at 2.7 per cent in November, way above the 2 per cent target, and inflation expectations are at a six-year high. In addition, house-price inflation shows no sign of levelling off and unemployment has fallen, adding to fears of inflationary pay settlements in January.

However, domestic demand proved weaker than initially estimated in the latest figures for GDP last week. If the Bank judges that wages will not rise in response to high levels of inflation, it is likely to stay its hand for the foreseeable future.

In a Reuters poll, most analysts expected that rates would still be at 5 per cent by the end of the year, with more forecasting that they would be lower than higher.

Rupert Pennant-Rea, former deputy-governor of the Bank of England, said: “Tell me what will happen to scores of statistics over the next six months and I’ll tell you what should happen to interest rates.”

He said that arguments for and against higher rates were well balanced, but his best guess was that rates might rise in February and perhaps again in the spring or the summer. “But the known unknowns are many and powerful, and the real unknowns could make fools of us all,” he said.

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