Bounty

The Bank of England may need to dramatically increase interest rates because of the soaring rate of inflation, experts have warned.

Andrew Lilico, chief economist at the Policy Exchange, said rates could hit 8% in two years' time.

He said it was was likely the UK would see the strongest economic growth since the 1980s after a double dip recession.

In a research note, Mr Lilico said: "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 £200 billion into the economy through quantitative easing.

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".

This will trigger a rise in inflation, and once inflation starts to rise, interest rates will have to rise too.

But despite the above target rate of inflation, most economists do not expect the Bank to raise interest rates until next year at the earliest, and any increases are expected to be gradual.