Inflation 'may push interest rates to 8pc'

Chief economist at the Policy Exchange Andrew Lilico said the Bank of England may be forced to dramatically increase the base rate owing to rapidly rising inflation.

Dr Lilico thinks Britain is likely to suffer from a double dip recession, followed by a boom, driven by huge monetary growth, leading to the strongest economic growth since the 1980s. He said in a research note: "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation."

The Bank of England has pumped 200bn into the economy. But Dr Lilico warned that this policy had quadrupled the money base, and he claimed that once the economy starts growing again, lending will expand and there will be "too much money chasing too few goods".

That will trigger a rise in inflation, and once inflation starts to rise, interest rates will have to rise too. "Since interest rate rises will raise mortgage rates, the initial effect will be even more inflation." He expects inflation to rise to about 10 per cent, similar to levels seen in the early 1990s and five times higher than the Government's 2 per cent target.

The steep rise in inflation and interest rates could also threaten the economic recovery and cause another recession in 2013 or 2014.