Interest rates are set to rise

Consumers and businesses in the UK, Europe and the United States face the prospect of dearer borrowing this week, as central banks threaten a triple whammy of interest rate rises.

Analysts fear higher oil prices and renewed signs of inflation in the world's leading economies could trigger a round of interest rate increases from the Bank of England, the European Central Bank and the American Federal Reserve.

"You could get all three raising rates this week," said Gerard Lyons, global head of treasury research at Standard Chartered bank. "The global economy is stronger, and there are strong domestic considerations in some countries."

The Federal Reserve, which meets tomorrow, is widely expected to be the first to move. Rapid economic growth and a booming shares market have caused concerns about a rise in inflation.

In Britain the buoyant housing market is the chief culprit likely to prompt the Bank of England's monetary policy committee on Thursday to increase the cost of borrowing from its current 5.25%, according to City analysts.

Figures last week showed that inflation in the housing market reached 11% in September, and the Bank fears homeowners borrowing against their new-found wealth might be planning a spending spree that could cause price pressures to spread throughout the economy.

"There is a case for them to act sooner rather than later," Mr Lyons said. "Externally, the world economy is stronger and commodity prices have picked up. But it's really domestic factors: consumer spending is firm, and there is rising credit growth and wage growth."

But some analysts think low headline inflation will keep the lid on wage deals in coming months. Pay experts Incomes Data Services say in a report published today that the acceleration in growth will not lead to a dramatic rise in wage awards.

Mr Lyons said of the Federal Reserve: "The bottom line from the Fed is that they have a bias to tighten. I feel they will tighten either this week or in November.

"So far this year they have taken out two of three rate cuts that happened during the Russian crisis last year. It's a close call this Tuesday, but it comes down to [Reserve chairman, Alan] Greenspan and I think it's more likely than not."

The European Central Bank, which announces its decision on Thursday, is thought by most analysts to be the least likely to raise rates from their current level of 2.5%. But last week the ECB's deputy governor, Otmar Issing, said inflation risks were increasing, suggesting the fledging central bank may be contemplating its first rate rise.

David Brown, chief economist at Bear Stearns International, said ECB interest rates could rise by half a point next week.

Growth is accelerating in the previously sluggish eurozone. Figures out this week are expected to show German unemployment falling for the first time in seven months.

"Economic growth is moving at such a pace that the ECB could surprise us by raising rates," said Ken Wattret, an economist at Paribas Capital Markets. A decision by the bank to hold its 2.5% benchmark rate on Thursday would "just be a stay of execution".

The euro region's economies are likely to expand 2.1% this year and by 2.8% in 2000, according to the IMF. Faster growth helped to raise the euro region's annual inflation rate to 1.2% in August from 1.1%.