Interest rates will have to rise by three per cent in order to tackle inflation according to the Organisation for Economic Development (OECD).
The world’s leading economic think tank said yesterday, in their economic outlook webcast, that they urge the Bank of England to raise rates to as much as 3.5 per cent by the end of this year.
Interest rates have been set at an all time low of 0.5 per cent since March 2009 in order to aid economic recovery, and many economists predicted that there would not be an increase for at least the next year while the new government tackles the huge deficit.
But the OECD has said that in order to combat spiralling inflation there may be calls for rate increases as early as the end of this year.
Inflation hit a 17-month high of 3.7 per cent last month, well above the government’s 2 per cent target.
A rise in fuel prices and VAT increases has pushed up the Consumer Price Index, which measures UK inflation rates.
The Paris based economic specialists said yesterday: "The authorities face the challenge of preserving credibility.
“The gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010.”
However in a positive message the OECD predicted global growth of 4.6pc this year and 4.5pc in 2011, which will help to lift world markets after several recent set backs.
On Tuesday the FTSE 100 fell below the 5000 mark for the first time in months and Lloyds shares dropped by 9 per cent.
This was as a result of investor’s increasing fears about economic stability in the eurozone and tensions mounting in Asia as the North/South Korea crisis escalates.
Following the tension in the markets the Organisation for Economic Co-operation and Development (OECD) has urged economic solidarity.
"This is a critical time for the world economy," said OECD Secretary-General Angel Gurría. "Coordinated international efforts prevented the recession from becoming more severe but we continue to face huge challenges.
“Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path. We also need to take into account the international spill-overs of domestic policies. Now more than ever, we need to maintain co-operation at an international level."
As well as a possible rate increase the economic recovery is also being boosted by the new coalition’s plans for drastic cut backs. Around £6.2 billion in public spending cuts have been earmarked and details will be given when Chancellor George Osbourne delivers his Budget on June 22.
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