Rates to hit 5.5pc by 2005

Bank of England base rates are set to hit 5.5 per cent by 2005, according to City economists.

The first rise since early 2000 is expected to be announced by the Bank's Monetary Policy Committee at its meeting on 6 November.

But the narrowness of this month's decision to hold rates, and strong figures for economic growth and high street spending, have left City economists scrambling to adjust their interest rate predictions upwards.

'We expect an extended tightening cycle which returns base rates to something like neutral - which we put at 5-5.5 per cent - over the next 18-24 months,' said Citigroup economist Michael Saunders.

Bond markets are already factoring in a rise of 1 per cent from the current 48-year low of 3.5 per cent within a year. Some City economists agree.

'Rate hikes back towards a roughly neutral level of 4.5 per cent or so look likely to us in the course of next year as the economy returns to trend growth,' says Joachim Fels of Morgan Stanley.

A rise to 5.5 per cent would hike the repayments on a £100,000 mortgage by about £120 per month. But other economists believe that the Bank will stop raising rates as soon as the housing market calms down.

'We expect a rise to 4.25 per cent by the middle of next year, although rates should then remain pegged as the housing market slows,' said Jonathan Loynes of Capital Economics.

One economist, Lorenzo Codogno of Bank of America, even predicts that an abrupt slowdown in the housing market will force rates back down again by the end of 2004.

But the consensus in the City sees rates well above 4 per cent next year, as the Bank takes advantage of a global economic recovery to 'remove the punchbowl' from Britain's exuberant consumers.

On Tuesday the Federal Reserve is expected to keep rates on hold as the US economic recovery gathers pace.