Interest rates 'must hit 5.75%'

The think tank wants tough action from the Bank of England

The Bank of England should raise interest rates to 5.75% by June in order to guard against wage-driven inflation, a think tank has warned.

While rates are expected to go up from 5.25% to 5.5% next month, the National Institute for Economic and Social Research says a bigger rise is needed.

It points to the fact that the UK's retail price inflation (RPI) rate is currently at a 16-year high of 4.8%.

RPI is the basis for many annual pay deals agreed at this time of the year.

'Cause for concern'

"The rise in RPI inflation feeding through into higher wage demands remains a cause for concern, one perhaps that would be counteracted by a half percentage point jump in the base rate," said the National Institute for Economic and Social Research (NIESR).

The government's own preferred inflation measure - the consumer prices index (CPI) - is currently at a record high of 3.1%, well above the Bank of England's 2% target.

Bank of England Governor Mervyn King has said he is determined to bring the CPI rate back within its 2% target.

He predicted last week that there would be a "sharp" decline in inflation over the next four to six months, further increasing speculation that the Bank will raise rates.

The NIESR thinks CPI inflation will exceed 2% for another year, blaming the Bank for cutting interest rates too far in 2005, when they were reduced to 4.5%.

The Bank of England will hold its next interest rate meeting on 10 May.