Interest rates 'to be painfully high for another four years'

The Bank of England will raise rates to at least 5.5 per cent within weeks and keep them close to that level until 2011, the respected Ernst & Young Item Club predicts.

Peter Spencer, the club's economic adviser, said the move was needed to curb explosive growth in borrowing and rein in inflation.

But after three rate rises since August, an even higher cost of borrowing will make mortgages much harder to pay off, leading to more repossessions and bankruptcies.

The club fears banks are lending too readily, leading to unsustainable growth in property investment and a mergers boom.

This is fuelling inflationary pressures in the economy and sounding alarms at the Bank of England.

Last week governor Mervyn King had to write to Chancellor Gordon Brown explaining a breach in his inflation target.

Mr Spencer said: "The huge boom in lending has to moderate, and if it doesn't rates will have to go up to whatever level is necessary.

"A 5.5 per cent rate will be very painful for a lot of people."

But he warned that if the medicine does not work, rates will have to rise even higher because the rapid expansion-in the amount of money sloshing-around the economy is unsustainable and highly inflationary.

The Bank of England is widely predicted to make another quarterpoint hike in rates from 5.25 per cent at its next meeting on May 10.

But some economists, including at the banking giant Citigroup, warn rates could rise a half point at the meeting. It would be the first increase of this size since the Bank won independence in 1997.

The Item Club report also attacked Mr Brown's management of the economy, saying he had been 'overly optimistic' about weakening public finances.

Mr Spencer said the boom in borrowing is leaving the country 'close to the edge', adding: "We are all skating - not to say wobbling - on thin ice. There's a danger that we are slithering into complacency."

And accountants Deloitte warned yesterday that the state of public finances under Mr Brown will leave his successor with another £10billion of tax hikes to make by 2010.

Shadow Chancellor George Osborne said: "The Item Club join a growing list of experts who question Gordon Brown's reputation for economic competence."