HOMEOWNERS will face a new interest rate rise within weeks, experts warned yesterday, despite inflation falling to its lowest level in seven months.

Falling gas and electricity prices saw the Consumer Price Index (CPI) - the government's official measure of inflation - ease to 2.5 per cent in May from 2.8 per cent the previous month.

Even though the drop was bigger than expected, it was not enough to prevent economists from predicting another interest rate rise.

The Bank of England has previously predicted one more rise in interest rates to 5.75 per cent will be necessary in July or August to bring inflation back on track.

Gas and electricity suppliers have cut prices by an average of just under 20 per cent since the start of the year, while falling vegetable and meat prices - including big falls in tomatoes, lettuces and cabbages - also made an impact. Inflation is likely to fall again this summer, as fuel bills continue to drop.

But the effect is being dampened by sharp rises in the cost of air travel, and economic growth in China and rises in global dairy and wheat prices caused by a drought in Australia and heavier demand for less ecologically-harmful biofuels.

Bank governor Mervyn King told an audience of business leaders in Wales earlier this week that "further action" on interest rates could be necessary if companies' pricing intentions remained strong and inflation expectations stayed high.

Mr King warned householders that there was a list of worrying inflationary pressures. "Obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels," he said.

Most experts now believe the debate is not whether interest rates will climb to 5.75 per cent but whether they will reach 6 per cent by the end of the year.

"Inflation in March was at its highest level since at least 1997, so unless CPI drops considerably there is still the threat of interest rate rises," said David Page, an economist with Investec. "The biggest cause of the drop has been the fall in gas and electricity prices but the overall trend in food prices is upwards so there will still be pressure on inflation in the medium term."

Martin Ellis, group economist with the Bank of Scotland, said: "Food prices are still going up. There has also been a change in China's position as a provider of cheap goods to the rest of the world. Economic growth in China means the price differences in the exported goods are less sharp than they were, adding to inflation."

The Retail Price Index, which is still used in many pay negotiations, fell to 3.3 per cent in May from 3.6 per cent in April. Including mortgage payments, the figure fell to 4.3 per cent in May from 4.5 per cent the previous month.

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