INTEREST rates could climb by as much as 1.25 per cent over the coming year on the back of a resurgent economy, according to analysts.

Such a move could hit homeowners hard and would add as much as £70-a-month extra on to a £100,000 mortgage.

Hopes that there might be a continuation in the string of nine rate cuts since the start of 2001, which have taken the cost of borrowing to its lowest level in 48 years, were dowsed last night.

Figures released yesterday suggested signs of a spending revival on the high street.

In the service sector, activity levels for July grew at their sharpest level in more than a year, while optimism was its strongest for 14 months.

A further reason for the Bank of England to keep rates on hold was provided by continued strength in the housing market after the Halifax said the cost of property rose by 1.3 per cent in July and by 19.2 per cent on a year earlier.

Fears are already high that consumers may have overstretched themselves financially while taking advantage of low interest rates.

In manufacturing, the lower cost of borrowing has so far failed to improve fortunes, although production figures did offer some hope yesterday.

The Office for National Statistics said that data indicated the sector had its strongest showing last month since July 2002.

Henk Potts, analyst at Barclays Private Clients, said: "It is likely we have reached the bottom in terms of rates.

"We think they will stay at 3.5 per cent for the rest of this year and rise to 4.75 per cent by the end of 2004."

But experts in the region believe the picture is not as bleak as some have painted it.

Professor John Wilson, of Teesside Business School, said: "It would be quite a reversal over the next 18 months to see interest rates increase in that way.

"A lot of people these days would be protected from interest rate movements because they would have taken out fixed interest rate mortgages over a number of years.

"If there is a hike in rates, that would dampen the housing market.