The Bank of England has to begin raising its key interest rate the next 18 months in order to hold back above-target inflation, the new semi-annual report by the OECD has warned. It assessment calls for an increase of 1 per cent by the end of the year, and 2.25 per cent by the end of 2012.

"A modest increase in interest rates should be taken during 2011 to stave off increases in inflation expectations, which are already elevated. As the recovery gathers momentum in 2012, the pace of normalisation of interest rates should be stepped up", it said.

Growth predictions for 2011 and 2012 are lower than the government's own forecasts, at 1.4 per cent next year, rising to 1.8 per cent the following year: "Growth is projected to remain slow during 2011. Public consumption and investment are set to fall significantly while household consumption is expected to remain subdued, reflecting falling real incomes and stagnant asset prices", the report said.

The economic thinkthank recommended that George Osborne boost public spending and raise revenues to help fill cuts in infrastructure investments by "ending exemptions and increasing lower rates in the VAT system". It said the government's budget deficit plan measures "strike the right balance", though the report projects that unemployment will continue to rise: from 7.9 to 8.1 per cent this year, up to 8.3 per cent in 2012.

The Economic Outlook review saw the UK placed behind most other leading industrial nations in its recovery from the 2008 financial crisis.

Global economic growth is expected to increase by 2.3 per cent in 2011, rising to 2.8 per cent in 2012. The report pointed to rising commodity prices, eurozone debt and a slowdown in China's economy as major downside risks to this projected recovery.