Brown hints at loan rate increase

Gordon Brown warned today that interest rates may have to rise next month to combat spiralling house prices and resurgent high-street spending.

The Chancellor also said education would be the big winner in next month's spending review, but promised not to slash defence spending to make ends meet.

He spoke out in a newspaper interview ahead of tonight's annual Mansion House speech in the City, in which he was expected to drop more hints about handouts to Whitehall departments.

Interest rates have been cut to historic lows to combat the fear of recession which hit America, Britain and Europe after the 11 September terrorist attacks.

Cheaper mortgages have given new life to the housing market, which appeared to flagging at the start of the year. This month's figuresare expected to show a record surge in new home loans.

While consumer demand also remains strong, manufacturing is still under pressure and industry chiefs are concerned that a rate rise could cost jobs.

However, the Bank's biggest worry about raising interest rates next month will be the possible impact on the stock market. Share prices are at their lowest for four years, mirroring the trend on Wall Street.

Economic growth in Britain has slowed to near-zero, putting the UK at the foot of the growth table for leading industrialised nations after several years near the top.

Despite the decline, Mr Brown told the Financial Times he was "cautiously optimistic" about prospects for growth this year.

He said: "With this strengthening global recovery and domestic consumer demand already strong, against a background of historically low interest rates, the Bank of England will have tough choices to make in the coming months to ensure sustainable growth and the maintenance of stability. We will back the Bank of England in the coming months in the decisions that it makes.

"The important thing that I think the British people do understand is that these decisions have got to be made with a view to the long-term future of the economy."

The clear steer from Mr Brown is bound to increase the chances that the Bank will opt for a rate rise next month.

'London houses too dear'