Gradual rise in interest rates needed to avoid setback

Mr Sentance warned that keeping interest rates at record lows for too long could erode confidence in the central bank's inflation target.

He said: "The longer we keep interest rates at an exceptionally low level, the greater is the risk that Bank Rate would need to rise sharply in the future, creating a serious setback to business and consumer confidence.

"We should seek to avoid such a sudden lurch in policy."

Inflation in Britain has been running above the Bank's two per cent inflation target all year and is likely to rise even higher in the near-term following a rise in VAT at the start of 2011.

Mr Sentance has been calling for a quarter-point rise in interest rates since June.

However, he has been a lone voice on the Bank's committee at a time when aggressive fiscal tightening has cast doubt over the sustainability of Britain's recovery.

However, Mr Sentance said there was a risk that forecasters were underestimating the strength of private sector demand, as they did after the recession of the early 1990s.

"There is a risk that we are making the same mistake again because of the preoccupation with downside risks following the financial crisis," Mr Sentance warned.

The Bank cut interest rates to a record low of 0.5 per cent in March 2009, and futures markets show investors are not expecting any rise until well into 2011.

Mr Sentance said: "I worry that monetary discipline and confidence in the inflation target risks being eroded by keeping emergency settings for monetary policy in place for too long,

when the growth and inflation outlook points in a different direction."

He continued: "That is why I have argued for a gradual withdrawal of monetary stimulus and why I will continue to do so."