More interest rates hikes expected

Interest rates should rise or the economy will pay the price with inflation, a financial think tank warned today.

The institute of fiscal studies (IFS) says that the economy has grown so quickly that recession fears at the start of last year has given way to concerns that the government will overshoot its inflationary target.

In a further blow to homeowners, the bank of England says that interests rates are likely to rise.

Minutes from the monetary policy committee, which set interest rates, say that members were torn between a big rise in January or a series of small hikes throughout the year.

Last week's 0.25% rise put interest rates at their current level of 5.75% and increased monthly mortgage repayments for homeowners with variable rate loans.

Inflation, however, is still low and the underlying rate of inflation in December, which excludes the cost of mortgage borrowing, was 2.2%, unchanged from last month. In a separate report, the council of mortgage lenders said that the number of property repossessions in 1999 was the lowest for 10 years.

Low interest rates and low unemployment have helped to minimise the risk of a return to the payment difficulties of the early 1990s, said director general Peter Williams.

The IFS report, called the Green Budget, predicts economic trends for the year ahead and sees scope for further spending increases or tax cuts as the chancellor Gordon Brown sits on an estimated ?6.8bn spending surplus.

The chancellor can allow for a ?3bn tax cut, the institute says.

Public spending is likely to fall as a proportion of GDP as the booming economy feeds larger tax returns into the treasury and the large number of people in work cuts welfare spending. It adds that if the government does meet its target of a 5% increase in spending on the NHS, healthcare spending will still be some way below the EU average.