A new report suggests UK banks’ IT spending is set to rise despite market turbulence. But the future is less bright for the back office.

A Kimsey Consulting report predicted a cut in IT trading budgets in the UK as investment banks count the cost of the credit crunch. However, a new report by European technology research firm Pierre Audoin Consultants (PAC) predicts that spending will, in fact, increase by 7.7% in the UK between 2007 and 2011.

What’s the reasoning behind this? “Institutions are panicking and may have frozen on short-term hiring and investment,” says the report’s author Rajeena Brar. “But if you look to the long term, banks still need to invest in compliance as well as conforming to regulatory demands, such as MiFID, which some still have work to do on.”

Meanwhile, a survey by Advanced Information Management (AIM) found that Basel II was the regulation most responsible for driving IT investment by banks, followed by MiFID and then Sarbanes Oxley.

However, the PAC report suggests that market pressures will see banks seeking to do more, which will drive the need for cost-cutting and lead to an increased focus on business processing outsourcing, with India tipped to be the main beneficiary.

Brar says there’s no reason to think high-end IT jobs will shift overseas though: “The Indian firms are pushing hard into the UK market, and are looking to build on value-added services. There’s also a skills shortage in the UK in areas such as SAP. And we’re seeing an increased demand for more senior consultants and architects, but I can’t see that going offshore.”