A leading economic thinktank has called for the Bank of England to raise interest rates in the near-term, warning that levels of inflation are likely to remain above the central bank's target for several years.
The National Institute for Economic and Social Research (Niesr) stressed that while expectations of higher interest rates and increasing oil prices are set to hold back UK economic growth over the next two years, consumer price inflation will remain above the bank's two per cent target through to 2008.
In its latest quarterly economic forecast, the thinktank said it expected the UK economy to grow by 2.5 per cent this year, the same level it previously predicted in April.
But it revised its forecast for economic growth in 2007 and 2008 to 2.6 per cent, as opposed to the 2.75 per cent it stated in its last bulletin.
Meanwhile inflation, which reached 2.5 per cent in June, is expected to remain above desired levels, with Niesr predicting that it will stand at 2.2 per cent by the fourth quarter of 2006 and at 2.3 per cent at the end of 2007.
Analysts believe that the Bank of England's Monetary Policy Committee (MPC) will opt to keep Britain's bench mark interest rate on hold at 4.5 per cent when it meets for its August rate-setting meeting next week.
But Niesr, which predicts that policymakers will increase borrowing costs by a quarter point before the end of the year, said that current economic conditions warranted the imposition of an earlier rise in interest rates.
"There's little to be gained by delaying the rise until late in the year," said Martin Weale , a director at Niesr.
"Given that we have inflation staying above target and given rates are expected to rise I cannot see a strong case for waiting," he added.
However, despite pressing the case for an early rise in interest rates, Niesr stressed that little damage would be done to the economy if the cost of borrowing did not rise until later in the year, providing inflation expectations stabilised.