British house prices are rising at their fastest since the boom of the late 1980s, increasing pressure on the Bank of England to raise interest rates to head off an upturn in inflation.

Britain's Chancellor of the Exchequer, Mr Gordon Brown, yesterday warned of higher rates unless employers and trade unionists tempered their wage settlements. Fears of a take-off in wages will have been heightened by a survey of manufacturing companies, published yesterday but conducted last month, which showed the first rise in employment in the sector since the beginning of last year. The Halifax house price index published this morning will show a rise of 2.8 per cent during October alone, the fastest rise recorded in a single month since 1988.

October's spike in prices takes the annual rate of house price inflation to 10.8 per cent, and has only been surpassed by three previous months' figures since Halifax began calculating the index in 1983. In September the annual rate was 8.8 per cent.

Mr Ciaran Barr, an economist with Deutsche Bank in London, said the Bank of England's monetary policy committee would heed the warning signals from the housing market when it meets to set interest rates this week.

The committee starts its two-day meeting tomorrow, with the result announced at noon on Thursday. The bank last raised rates, by a quarter of a percentage point to 5.25 per cent, in September when it cited the housing market as one of the reasons behind the move.

Mr Brown, speaking at the Confederation of British Industry's annual conference, said: "Under the new system, unacceptably high wage rises will not lead to higher inflation but to higher interest rates.

"It is in no one's interests if today's pay rise threatens to become tomorrow's mortgage and interest rate rises."