Interest rates could return to levels not seen since the late 1990s, warns Andrew Lilico, chief economist at the influential Policy Exchange think tank.

He said inflaiton is likely to rise to around 10pc, due to the quantitative easing policies, which pumped money into the economy, and increased post recession economic activity.

To control inflation, he said, "interest rates will rise rapidly. To keep inflation down to only 10% for one year, the economy will have to be able to tolerate interest rates of perhaps 8%." The consequences of that, he added, would be a further recession in 2013 or 2014.

Mr Lilico said: “Given the constraints of late 2008 and the absurdities of subsequent fiscal, finance and regulatory policy, if we can get away with a recession of only 6.6%, deflation of only 2% and inflation of only 10% for one year, Mervyn King will deserve a medal.”

The economist also predicted Britain would endure a brief 'double-dip' recession early next year, followed by a boom in the economy. But he added that this boom would quickly run out of control.

His argument is that the £200bn of cash pumped into the economy by the Bank of England under its quantitative easing mechanism to jolt the economy is a “huge expansion in the money supply, which will lead to inflation”.

Other economists, however, said the low rates are here to stay as the recovery remains weak.

Official figures last week showed annual inflation as measured by the Consumer Prices Index had eased in July to 3.1% from 3.2% in June, but is still well above the Bank's 2% target.

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