Imminent increases in mortgage rates could force the Minister for Finance, Mr McCreevy, once again to increase his inflation forecast.
The annual forecast, which he raised last week to 4.25 per cent, is likely to prove conservative after mortgage rate increases feed into the consumer price index.
The rise in borrowing costs will follow yesterday's quarter point increase in the European Central Bank's main lending rate to 4.5 per cent as it moved to stem rising inflation across the euro zone, which now averages 2.4 per cent. It could mean inflation here will reach 6.8 per cent over the coming months, according to Mr Austen Hughes, chief economist at Irish Intercontinental Bank.
This will be further boosted if, as expected, the ECB raises rates again in the autumn.
Rising prices will put further pressure on the Programme for Prosperity and Fairness, where workers have seen gains negotiated under the agreement quickly outstripped by rising prices.
Banks and building societies are likely to increase mortgage repayments by the full quarter of a percentage point which the ECB put on to base rates. However, the increase is good news for savers. Northern Rock last night passed on the full amount and will offer 5.5 per cent to depositors from September 18th.
Mortgage repayments are likely to rise within weeks. Repayments on a £100,000 mortgage will rise by about £14 a month. Borrowers on a variable rate of 5.5 per cent on a 20-year loan pay just over £688 a month. This will rise to £702 if the full increase is passed on to customers, bringing the rate up to 5.75 per cent.
Since the low of 3.99 per cent last autumn, borrowers with a mortgage of £100,000 will have seen monthly repayments rise by about £97 a month.
The Labour Party environment spokesman, Mr Eamon Gilmore, called on financial institutions to refrain from passing on higher mortgage costs. "A decision to defer this increase might restore some public confidence in them."
In a statement yesterday, the ECB said it had acted in response to price rises stemming from the recent weakness of the euro and high oil prices, and was ensuring favourable prospects for strong growth in the euro area. It would "remain alert" to all emerging risks to price stability.