More interest rate pain for home-buyers and businesses was in prospect last night after the Bank of England signalled that the cost of borrowing is set to rise again during the autumn.

The Bank’s latest forecasts for the economy in its quarterly Inflation Report showed that the extra quarter-point base rate rise already expected by markets by early next year will be needed if inflation is to be kept to its target.

A further rise in interest rates, the sixth since last August, would take rates to 6 per cent, their highest since early 2000, and the forecasts showed that this would drive inflation back to its 2 per cent target during next year. Inflation would then stick close to that level before slipping below target in two years’ time.

Without an extra rate rise, inflation – boosted by dearer oil, as well as the likely impact of recent floods on food prices – would overshoot its target throughout the next two years, the Bank’s analysis suggested.

Mervyn King, the Bank’s Governor, sounded a warning on big uncertainties clouding the outlook, meaning that it was “a foolish game to sit down now and say we know what interest rates are going to be”.

However, City economists said that, although factors from credit market turmoil to foot-and-mouth disease may persuade the Bank’s Monetary Policy Committee (MPC) to hold fire next month, yesterday’s report made a new rate increase a near-certainty.

The City consensus that still higher borrowing costs are now all but certain was reinforced by tough comments by Mr King highlighting recent very strong economic growth alongside “upside” risks that inflation would end up higher than in the Bank’s main forecasts.

The Governor noted that growth had been motoring above its long-term average for six successive quarters, with surveys of business conditions “even more upbeat” while “activity in the world has remained buoyant”.

Although noting “tentative signs of a slowing of household spending”, he emphasised that “business investment has been strong and consumer spending has remained firm” despite dearer money. With this strong demand leaving less slack in the economy to cap inflation, he argued that “businesses may now be more confident about raising prices” and that this posed the “main upside risk” over inflation.

The Governor left little doubt as to the Bank’s belief that it must now hit the brakes harder to slow growth.

He said that he wanted to be “very transparent” that, if the MPC delivered an assumed rate rise to 6 per cent, this would spell “a noticeable slowing in demand growth led by consumption and business investment”.

“We do expect to see a slowing in consumer spending in the next year, but nothing terribly dramatic,” he said.

The MPC’s forecasts pointed to domestic demand growth dropping from about 3 per cent now to about 2 per cent by mid-2008.

The Governor also played down widespread claims that the impact of thousands of people seeing an imminent end to cheap fixed-rate mortgage deals would sharply amplify the toll from past interest rate increases. “The overall impact is still very small,” he insisted.

The MPC’s concern about the economy’s recent potency was emphasised as it said that it believes official growth estimates are likely to be revised even higher. The Bank released its own estimates showing that second-quarter growth may have hit a red hot 3.5 per cent annual pace, against an officially reported rate of only 3 per cent rate.

However, the Bank also boosted speculation that a rise in rates to 6 per cent could take them to a peak.

With one more rate rise, its forecasts showed that the economy would slow more sharply than expected in its May projections, taking growth to about its long-term average, and in turn pushing inflation below target.

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