Homeowners can expect a year of rising mortgage repayments

The Bank of England is set to raise interest rates this week for the first time in more than three years, with homeowners facing the first of several increases in mortgage repayments over the coming year.

The bank's monetary policy committee is expected to announce a quarter-point rise in rates from their 48-year low of 3.5% on Thursday, with some analysts even pointing to a 0.5% increase to 4%.

A steep rise in personal borrowing, a surge in house prices and firmer retail sales growth are expected to outweigh pleas from manufacturing for a wait and see response.

Today the Engineering Employers' Federation, EEF, admitting that rates will need to rise "at some point", urges the MPC to stay its hand this week and warns that a rapid increase would undermine hopes of recovery.

But in its latest business trends survey, accountant BDO Stoy Hayward says economic growth is accelerating, with business confidence at its highest level since 2000 and output firmly on the rise.

It adds that inflation expectations have made their single biggest jump in any quarter on record as firms try to boost their profits by raising prices at a time of healthier demand.

Last month the MPC narrowly voted to keep rates on hold, but most City economists say this week's likely rise will be the first of many, with borrowing costs set to peak at around 5.5% in 2005.

John Butler, an HSBC economist, said the bank would raise rates by 0.25% this week, with a further quarter-point rise to 4% by February. "A stronger global recovery may force rates up further, but that runs the risk of provoking a sharp consumer correction," he said.

Peter Dixon of Commerzbank said the MPC was unlikely to act in December, just before Christmas, but dealers still thought there was a 50-50 chance it could opt to push rates up by half a point. With optimism fuelled by the 7.2% leap in American economic output in the third quarter, the BDO survey suggested UK economic growth could reach 2.2% by the second quarter of next year.

Chancellor Gordon Brown is forecasting overall growth in 2004 of 3-3.5%, while the National Institute of Economic and Social Research suggested last week it would reach 2.6%. But the EEF said that while the outlook had improved, there were few signs of a recovery in manufacturing "catching fire", with growth in most of Europe remaining weak.

Steve Radley, its chief economist, said: "The upturn in manufacturing remains hesitant and recovery hopes will take a blow if higher rates lead to further strengthening of sterling against the dollar and euro. We urge the MPC on balance not to increase rates at its next meeting but to move cautiously forward, keeping a close eye on currency movements."

Last week sterling reached a five-year high against the dollar and a six-month high against the euro.