The Bank of England has warned that interest rates must rise to curb the increase in inflation.

The Bank’s forecasts showed that, despite last week’s rate rise to 4.25 per cent, inflation is still in danger of breaching its two per cent target in two years’ time.

Governor Mervyn King backed the City’s belief that the Bank will raise rates at least as fast as markets have anticipated.

"The view that the market has been taking lately . . . is not an unreasonable one," he said.