Something's been happening in financial markets over the past month. Slowly but surely, the realisation has dawned that interest rates are too low to keep inflation at the 2 per cent target rate in the medium term.
Just a few weeks back, most economists were talking about the need for a further rate cut. Market traders were not so pessimistic, but still thought rates would stay at 4.5 per cent through this year and next.
That's changed now. Indeed, a quick glance at the prices of financial futures contracts shows that traders expect the Bank of England base rate to rise to 5 per cent by the end of this year, with the first increase in late summer or early autumn.
That's a big switch over such a relatively short period of time. So, what's behind it?
Activity in our main trading partners has remained strong. In Europe, surveys of both manufacturing and the service sectors came in stronger than expected. New car registrations were up almost 7 per cent in the year to March. Industrial orders rose by more than 13 per cent in the year to February, and confidence improved again in April.
Surveys in the US have also pointed to an unexpectedly vigorous level of activity. Durable goods orders spiked in March. Consumer confidence surprised on the upside in April, and spending remains reasonably strong.
All of this is good news for the UK. The latest trade data shows that exports of goods are growing at an annual rate of almost 20 per cent, and imports at a similar rate. That probably reflects reasonable consumption growth, but it could also point to the beginnings of a turnaround in investment, and some restocking as companies have become more confident about the level of demand.
The strength of exports and the apparent bounce in investment will encourage the Monetary Policy Committee, which had been hoping for some time that demand would become better balanced, or less reliant on household spending.
And the good news doesn't stop there. The major quarterly surveys of the economy both suggest export growth will remain strong, if not strengthen, over the coming months.
And it's not just the parts of the economy that are exposed to overseas demand that are doing well. Growth in non-retailing services has risen to its highest level for over two years.
House prices rose another 2 per cent in April on the Halifax measure, meaning that in the past three months they were nearly 10 per cent higher than over the same period a year earlier. Mortgage approvals continue to rise.
Much has been made by some of the more pessimistic commentators of the apparent weakness of retail sales. But sales were up a healthy 0.7 per cent in March, after an increase of 0.3 per cent in February. Spending over the next few months should be supported by higher-than-expected house prices and equity prices, along with core earnings growth of close to 4 per cent.
Given all of this, the Monetary Policy Committee's May Inflation Report is likely to include an upward revision to its short-term growth forecast. More to the point, it would be surprising if any committee members other than Stephen Nickell were still thinking that a further rate cut is needed.
We're not quite at the point where members will actually vote for a rate hike. That's because most, if not all, of them will want to see the strength of recent data repeated in other growth numbers over the next few months before voting an increase through. They'll also want to see some evidence that strong activity is pushing prices higher. But we're not far off. Indeed, the base rate looks set to be raised by 0.25 points in August.
David Hillier is the chief UK economist at Barclays CapitalReuse content