Mortgage interest rates will continue to increase in 2007, a leading economist has predicted.

Niall Dunne, financial markets strategist at Ulster Bank, said the European Central Bank (ECB) could easily increase its base rate to 4 per cent and beyond in 2007.

The ECB rate, to which mortgage lending rates are linked, is currently 3.25 per cent. However, a quarter percentage point hike to 3.5 per cent in December is "a foregone conclusion" and traders and investors are looking to the year ahead to determine the direction of interest rates, he said.

Traders in the futures market expect there will be one further hike in the interest rate cycle, which would take the rate to 3.75 per cent in the spring next year.

Writing in Ulster Bank's winter edition of its Focus on Markets publication, Mr Dunne said this was the market's collective opinion and also the official forecast of Ulster Bank's parent, the Royal Bank of Scotland group.

But Mr Dunne said the futures market's opinion was changeable and the market could be warning of a move to 4 per cent in 2007.

"The ECB will hike if the governing council identifies inflationary pressures, irrespective of events elsewhere in the world," Mr Dunne said. "Markets seem to think that the ECB will not hike next year if the US slows as expected, but markets are wrong."