Sorry, but it's time to put up interest rates
Borrowers won't thank me for saying this but it is time for the Bank of England to start hiking interest rates.
The economy is recovering at a break-neck speed, inflation is far too high and savers are being wiped out by ridiculously low rates of interest. Andrew Sentance, the one hawkish member of the Bank of England's monetary policy committee (MPC), is spot on: we must start weaning ourselves off ultra-cheap money before we become truly addicted to it.
The data backs up my contention. The economy, which expanded by 0.8per cent in the third quarter, has already recovered 40 per cent of its loss incurred during the recession, a much speedier bounce than expected.
Even assuming that growth slows to 0.4 per cent in the fourth quarter, GDP will increase by 1.8 per cent in 2010, easily smashing the consensus forecast of 1.3 per cent made by economists at the start of the year.
This kind of growth rate means that there is no longer any excuse to keep interest rates so low.
The latest figures reveal that the expansion hit 2.8 per cent year on year. To put this into perspective, it is above the 1998-08 boom-time average of 2.6 per cent a year. The figures were substantially stronger than the MPC had expected. So it is no wonder that the Bank as also got it wrong on inflation.
Prices have been going up at a much faster rate than it expected, forcing Governor Mervyn King to repeatedly write letters of apology to George Osborne.
Even the consumer price index, the official measure of inflation, is now at 3.1 per cent. Inflation on the retail price index - the broadest measure of inflation, including mortgages – is running at 4.6 per cent per cent a year.
One reason why the economy did better than many feared in the third quarter is that most analysts have misunderstood what is happening to the money supply.
While the total amount of money in the economy as been growing at a sluggish rate, it has been circulating much more quickly, boosting demand.
Next year will be tough but the private sector's momentum should allow it to cope with public sector cuts; in fact, contrary to what many expect, these could even boost growth if they reassure companies that the UK is once again a safe place in which to invest.
All the talk from City economists about needing to indulge in yet more quantitative easing is therefore senseless. The debate needs to move on: it is time for the Bank to start hiking interest rates.
Allister Heath is editor of City A.M.