There is a "real chance" the Bank of England will raise interest rates as early as next week, says Skandia, with subsequent hikes pushing rates up to 3% by the end of next year.
Skandia head of asset allocation Rupert Watson says the Bank could raise rates from their historic low of 0.5% next week amid signs the economy is strengthening and eurozone risks diminishing.
"Given what has happened over the past few weeks, there is a real chance interest rates will rise next week - 10 February," he says.
However, he adds his "guess" is the MPC will hold fire on hiking rates until the inflation report meeting in May.
"Thereafter, they might raise rates by 0.25-0.5% per quarter taking rates to well over 2% (possibly over 3%) by the end of 2012."
Watson previously predicted rates would stay on hold until the end of this year or early next year but he says recent economic data and hawkish sentiments revealed in the most recent Bank of England minutes has caused a change in outlook.
"Recent data (in particular the recent PMIs) suggests there has not been a significant slowing in the economy," he adds.
"Meanwhile the global economy is strengthening and the risks from Europe diminishing. The question MPC members will be asking themselves is ‘do interest rates still need to be at the lowest level ever?'"
His comments come in the wake of a string of positive economic data which has played down fears of a double-dip recession. Buoyant data from the manufacturing, construction and service sectors have raised hopes the recovery is back on track.
Watson's changed outlook has also been influenced by pressing inflation concerns. In December, CPI climbed from 3.3% to 3.7% and although the Bank expects inflation to fall back to target next year, he points out some members of the MPC are worried about rising inflation expectations.
Interest rates have now been at their historic low of 0.5% for almost two years.
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