A further interest rate rise is a must if the Bank of England hopes to cool the booming property market, economists have warned.

According to the Ernst & Young Item Club, the continued growth in house price inflation is a strong justification for increasing the cost of borrowing 5 per cent.

Indeed a leading estate agent has predicted that house prices will grow by a further six per cent next year, moving property further out of reach for first-time buyers.

However, such a rise would be welcomed by existing homeowners, many of whom could take advantage of a homeowner loan.

But the Item Club also points to other economic factors, such as the strength of the financial markets, the continued pick up in retail sales and the growth in the size of the labour force, as signs that interest rates should be hiked again.

Peter Spencer, chief economic advisor to the Item Club, said: "Interest rates need to be raised again in November to stop credit expansion and asset price inflation spilling over into excessive demand and inflation. If house prices continue to accelerate, interest rates will have to rise further in 2007."

The Bank of England raised interest rates by a quarter percentage point to 4.75 per cent in August, but with inflation running above its 2 per cent target many experts are anticipating a further rise before the year is over.

Posted by: Peter Kudela
Date: 25th October 2006