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A stronger currency would also help the world's second-largest economy rein in food and property costs by reducing the price of imported crude oil, iron ore, grain and other commodities, the Washington-based lender said.
"There's a lot of scope for increasing interest rates further," Ardo Hansson, the bank's chief economist for China, told reporters at a briefing to coincide with the launch of the latest Global Economic Prospects report.
The benefits of raising interest rates, which would help cool the red-hot property market, outweighed the risks of attracting more speculative money from overseas, Hansson added.
After cutting rates by 200 basis points during the global crisis, China has raised its key lending and deposit rates by just 50 basis points each since October, leaving room for a "couple of increases" this year, Hansson said.
But he warned Beijing should be "prudent and careful not to overreact" when tightening monetary policy to avoid slowing the economy too quickly.
Ever fearful about inflation's potential to spark social unrest, top leaders have been pulling on a variety of levers to reduce food and property costs after inflation in November rose at the fastest pace in more than two years.
Beijing has blamed the United States' loose monetary policy for pushing down the value of the dollar and fueling a flood of liquidity into fast-growing emerging economies, such as China.
While the volume of capital flowing into East Asian developing countries surged 52% year-on-year in 2010, this was not the reason for China's inflation problem, World Bank chief economist for East Asia Vikram Nehru told reporters during a teleconference.
Nehru said the country's strict currency controls - which prevent the yuan from appreciating too quickly and drain money from the banking system - have been effective in stemming inflows into the economy.
"Very expansionary fiscal and monetary policies have been behind the price increases in China which have been exacerbated to some extent by supply disruptions on the food front," Nehru said.
Beijing opened the credit valves in late 2008 with a $586bn stimulus package and massive bank lending, which released a flood of capital into the economy, fuelling property prices and inflation.
