The leading economic think-tank the National Institute Economic Review (NIER) has criticised the Bank of England for not acting sooner to curb inflation.

With the vast majority of financial observers predicting that interest rates will rise for the fourth time in just ten months when the Bank of England Monetary Policy Committee (MPC) meet on 10th May, concern over interest rates and inflation has never been higher, especially given growing concern of the effects of runaway house prices on the economy. (Read more: UK Housing Market Remains Strong).

Last month, the Governor of the Bank of England Mervyn King was forced for the first time to write a letter to the Chancellor explaining why the bank had failed to keep CPI inflation below the desired target of 2%. Instead, figures for March show that inflation is currently running at a record 3.1%. (Read more: Sharp Rise in Interest Rates Sparks Rates Rise Fears).

Commenting at the time of the decision Ian Kernohan, Economist at Royal London Asset Management, predicted that interest rates are bound to rise in May.

“If the MPC does raise rates aggressively, then the risk to GDP growth and interest rates in 2008 is definitely on the downside,” he said.

However, leading economists writing in the latest issue of the National Institute Economic Review (NIER), argue that had the Bank of England acted sooner, inflation would not be running as high as it currently is.

‘If fiscal policy had been tightened earlier, then the chances of breaching the upper limit would have been lower,’ write Ray Barrell and Simon Kirby.

Research conducted by NIER revealed that the cut in interest rates to 4.5% introduced by the Bank in August 2005 was, in retrospect, ‘unwise.’ Had the bank raised interest rates by 0.25% instead of cutting them by 0.25% at this time, research suggests that inflation would be 0.1% less than it currently is, thereby cutting the chances of the Governor having to write a letter to the Chancellor.

‘A pre-emptive move in late 2005 might have reversed the rise in expectations as well as reduced inflationary pressures, and we might now see inflation much lower,’ concluded the authors.

Martin Weale, Director of the NIER, which is based in London, argues that the Bank of England is “reluctant to spring big surprises,” which is why the bank did not raise interest rates in 2005, instead opting to cut them as was expected at the time.

While a sharp rise in interest rates of 0.5% cannot be ruled out in May, Weale expects a 0.25% rise to be the “most likely outcome” when the MPC meet. The NIER also predict that inflation will fall away from its current high of 3 per cent by the end of 2007. It also predicts that following current economic data interest rates could be at, or close to, the same level of 5.5% they are expected to rise to in May.

What now for interest rates? Will the Bank of England raise interest rates in May, despite increasing evidence that the property market is beginning to cool? Share your thoughts using the Comment on this Article box below.

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