WEIGHT has been added to the case for a further rise in interest rates, with an influential City report saying the cost of borrowing needs to increase to cool the housing market.
The Ernst Young Item Club used its autumn forecast to press for a rise in rates to 5 per cent next month to bring house prices back under control.
With inflation above its 2 per cent target and expected to rise, the Bank of England is widely predicted to raise rates next month following the first increase for two years in August.
The Item Club said that the economy was "very buoyant" and upgraded its growth forecast for next year from 2.6 per cent to 2.9 per cent.
It predicts growth of 2.6 per cent his year, which is above the 2 per cent to 2.5 per cent forecast by Gordon Brown, the Chancellor.
The Item Club said the economy had been bolstered by a rise in the number of workers in the UK, including those of retirement age and migrants. It also pointed to a strong performance by the stock market, which has seen the FTSE 100 return to levels not seen since February 2001.
Peter Spencer, chief economic adviser to the Item Club, said: "The UK economy is expanding quicker than many of us anticipated - but it can go faster.
However, 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 report said the stronger growth figures had handed Brown a tax boom with extra revenues from the likes of stamp duty.
However, Spencer said public spending was also higher than expected, making little overall difference to the Treasury's books.
"It looks like Lady Luck has come back to cheer the Chancellor up, just as it appeared she had given up on him," he said. "The Treasury, after missing its targets last year, adopted more conservative forecasts in the March Budget and Brown will be able to make much of this growth spurt in the Pre-Budget Report.
"However, the public spending figures are already higher than projected. The Treasury may be benefiting from extra tax revenues, but the public purse is still empty.
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