Bank hints at new rate rise

The Bank of England today signalled that interest rates are set to rise again amid concerns about the housing boom and consumers' reluctance to stop spending and borrowing.

Presenting the Bank's latest forecasts on the economy, Governor Mervyn King hinted that higher borrowing costs would be needed to keep a lid on inflation as the economic upswing continued.

The Bank lifted the base rate by a quarter of a percentage point to four per cent last week, citing worries about mounting price pressures.

Mr King said today: "It is crucial to bear in mind that, in the central projection, inflation is continuing to rise at the two-year horizon and that the risks, although broadly balanced, are nevertheless considerablein both directions." City economists interpreted Mr King's comments as a coded warning that more rate rises lie ahead. Financial markets predict rates will end the year at 4.75 per cent.

Although inflation is low by historic standards at 1.3 per cent, it is expected to climb in the middle of the year as slack in the economy is used up.

The Bank also issued a fresh warning over the housing market and household debt. Reiterating concerns that the higher property prices rise, the greater the risk of a crash, the Bank said: "The current rate of house price inflation remains well in excess of earnings growth and is not sustainable in the medium term." Figures last week from Halifax showed house prices surged 2.2 per cent last month.

Nevertheless, the Bank was optimistic on prospects for the economy generally, predicting growth of about 3.2 per cent this year, in line with Gordon Brown's forecasts. Mr King said: "Over recent months growth in the United Kingdom has been strong. It is expected to remain so."

The economic revival was reflected in news today that unemployment posted its biggest fall in two and a half years last month. The number out of work and claiming benefit dropped by 13,400 to 892,100 - the lowest since 1975.