The UK looks set to be the first major economy to raise interests rates this year - the only question is by how much.

The Bank of England's Monetary Policy Committee (MPC) is expected to increase the cost of borrowing when it announces its decision on Thursday.

Most economists and City analysts predict that the nine-member committee will raise the Bank of England's minimum lending rate by 0.25 percentage points to 5.75%.

However, some believe that the hike could be as much as 0.5 percentage points.

The move will mean higher borrowing costs for home buyers and businesses - although it will good news for savers.

Pre-emptive strike

Although the economy is relatively inflation-free at present, the committee will be hoping to pre-empt a potential inflation threat in coming years.

Core inflation stands at just 2.2% - below the target rate of 2.5%, but a raft of recent economic data have increased fears that inflation may soon take hold again.

The country's largest mortgage lender, Halifax, said that annual house price inflation hit 13.6% in December, the highest level since the housing boom of the late 1980s, while the Nationwide has reported house prices in London rising by more than 20%.

But with mortgage rates heading higher, economists predict the housing market should start to slow during 2000.

A jump was also reported in retail sales in December, while a services sector survey from the Chartered Institute of Purchasing and Supply showed continued expansion.

Industry opposes move

Industry and unions are usually opposed to interest rate increases as they make British goods less competitive abroad which can impact on profits and therefore on jobs.

The problem is compounded by the fact that interest rates in rival euroland countries are currently just 3%.

The Confederation of British Industry and the British Chambers of Commerce (BCC) have already made their case for leaving rates on hold.

Dr Ian Peters of the BCC warned that "any sharp increase in interest rates in 2000 holds the danger of undermining the fragile recovery in the manufacturing and traded sectors."

However, employers group the Institute of Directors (IoD) has surprised many by saying it accepts the need for higher borrowing costs.

Ruth Lea, head of the IoD policy unit said: "We accept they (interest rates) need to rise in order to maintain the low inflation stability which is essential for business."

Not the last

The Bank of England raised rates twice at the end of last year and economists believe it is set to tighten monetary policy further this year, with rates peaking at about 6.5%.

"It doesn't look as though there are any signs of things cooling off (in the economy) just yet," said Dharshini David, economist at HSBC Global Markets.

She forecast that interest rates will peak this year at 6.5% at the end of the second quarter.

"It is likely that we have now entered a period of more aggressive tightening after the on-off pattern of the last four months," she said.

Some economists, however, warn against over-reacting.

"Britain's Monetary Policy Committee (MPC)...should take account of all the influences on growth and inflation and the difficulty of measuring inflation in such a rapidly changing economic environment," said Darren Winder, European economist at Warburg.

"With growth set to slow in the latter part of the year, and with inflation set to remain below target, interest rates can be expected to both rise and fall over the next 12 to 18 months."