Brown hints at rate rise next month

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.

He spoke ahead of tonight's annual Mansion House speech in which he was expected to drop more hints about handouts to Whitehall departments.

Interest rates have been cut to combat the fear of recession following the 11 September terror attacks on the United States. Cheaper mortgages have given new life to the housing market, which appeared to be flagging at the start of the year. This month's figures are expected to show a record surge in new home loans.

Manufacturing is still under pressure and industry chiefs are concerned a rate rise could cost jobs. But 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.

Economic growth is near zero, putting the UK at the foot of the growth table for leading industrialised nations. Yet Brown told the Financial Times he was 'cautiously optimistic' about prospects for growth this year.

He said: 'The Bank of England will have tough choices to make in the coming months to ensure sustainable growth and the maintenance of stability. These decisions have to be made with a view to the long-term future of the economy.'

London house prices are overvalued by 31%, experts warned today, but they play down the chances of a Nineties-style crash.