CONTINUING strong growth in mortgage lending and credit figures have underlined the dilemma surrounding interest rates.

According to figures published yesterday, underlying credit growth rose to 14.3 per cent at the end of October from 13.3 per cent in September. At the same time, residential mortgage lending was up 17.1 per cent year on year in October, compared to 16.5 per cent in September.

The Central Bank is known to be concerned that high level of credit and mortgage lending growth could drive up inflation, putting our qualification for the euro in doubt.

The figures make an interest rate rise more likely. Yesterday, money market rates increased slightly, pointing to nervousness about an interest rate increase. According to Mr Jim O'Leary, chief economist at Davy Stockbrokers, the lending figures are certainly not what the Bank would have wanted to see.

"The figures confirm that the slowdown in September was an aberration," he said. "The whole situation confirms the extraordinary dilemma the Bank finds itself in."

The Bank's problem is that an interest rate rise is likely to dampen down the credit figures, hence easing inflationary pressures, but that it would also accelerate the pound's strength at the top of the ERM band.

"The risk of a rate rise is higher now," Mr O'Leary said. "But the probability is still quite small."

However, Mr Alan McQuaid, economist at Bloxham Stockbrokers, disagreed. "Irish retail rates will be increased by a quarter point by the end of the first quarter next year," he said. "If inflation does show signs of getting out of hand then there is also the possibility of more rate hikes later in the year."