Interest rates may be increased next year and quantitive easing (QE) could be removed, according to Mervyn King, the governor of the Bank of England.

The Bank of England's Inflation Report predicted that Britain will recover faster than anticipated from the recession, but the economy is still fragile. The report said that GDP will grow by 4% in 2011 - forecasters had previously predicted just a 3% growth.

In the key set of three-monthly forecasts, the Bank said that if interest rates were left at their current historic low of 0.5% and the £200bn of QE left in place inflation would, within two years, be above its 2% target.

"The considerable stimulus from the past easing of monetary and fiscal policy and the depreciation of sterling should lead to a recovery in economic activity," said Mervyn King.