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.

"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.

Source: BBC