Continuing rises in house prices are set to prompt the Bank of England to raise interest rates.

Members of the monetary policy committee began a two day meeting on Wednesday to consider their next move - the announcement will come at midday tomorrow.

The last time that interest rates rose was February 2000, while the MPC was reducing them as recently as July of this year.

With revised statistics now suggesting the economy is continuing to grow strongly, analysts are predicting that rates will rise by up to two per cent over the next two years.

Ahead of the Bank's decision, lenders were confident that a small rate rise would not lead to a housing market crash.

Data from the Halifax showed that house prices rose by 1.2 per cent in October.

But annual house price inflation has slowed to 16.7 per cent, compared to a figure of 24.5 per cent this time last year.

"House prices are now 16.7 per cent higher than a year ago showing that the housing market remains strong and is still underpinned by strong fundamentals," said Halifax chief economist Martin Ellis.

"Most commentators now expect the MPC to announce a small increase in the cost of borrowing later this week.

"A 0.25 per cent rise in interest rates will add around £4 per week to a typical £80,000 mortgage - a figure which can easily be absorbed by the vast majority of UK households."

Manufacturing data published on Wednesday also found that manufacturing output is now lower than a year ago.

Liberal Democrat Treasury spokesman Vincent Cable warned that a rise in interest rates now could "help prick the house price bubble but undermine the recovery in manufacturing".

And David Kern, economic adviser to the British Chambers of Commerce, said the manufacturing figures showed that the recent upturn in the sector "may already be stalling".

"The clamour for early interest rate increases is clearly unjustified," he warned.

"Whatever decision the MPC announces tomorrow, any consideration of further interest rate increases should be delayed until the economic situation is and the manufacturing recovery is more secure and firmly based."

The latest data follows a CBI report earlier this week that found retail sales growing solidly in October, rising at their fastest year-on-year rate for 18 months.

"Clearly the pick up in the global economy has strengthened the case for a reversal of the precautionary cut made by the bank in July, which was intended to give the UK some insurance in case the global economy took a further turn for the worse," said CBI chief economist Ian McCafferty.

"But the recent recovery in the wider UK economy is in its early stages and is still fragile. The bank needs to ensure that it does not damage business confidence with a series of quick rate rises.

"The MPC must make clear that in the coming months it will not choke off a recovery that has still not fully taken hold."