By Steve Schifferes BBC News Online economics reporter

House price inflation is worrying the Bank of England

The likelihood of a rise in UK interest rates has begun to alarm borrowers and headline writers alike. But how serious are the prospects?

The headline writers in the popular press have been having a field day after the governor of the Bank of England, Mervyn King, warned that interest rates will have to rise "at some point" from their record 48-year low.

"Ten years of rate rises," screamed the Mirror.

"Interest rates to rise for 10 years: Bank of England warns homeowners," said the Express.

Mr King said none of that. Rather, speaking to business leaders in Leicester last Tuesday, Mr King warned that the UK had benefited from favourable economic circumstances over the past decade, but that these would not necessarily persist.

"When shocks, as they will, hit our economy, it is almost inevitable that there will be somewhat greater volatility of both output and inflation than the remarkable stability to which we have become used in recent years," he said.

Rate pressures

There is no doubt that the Bank of England is, for the first time in several years, considering raising interest rates.

Mervyn King: Interest rate hawk

Both at the September and October meetings of its Monetary Policy Committee, the published minutes reveal that some members thought "an increase in rates might soon become necessary," with four out of nine members voting for an immediate rate rise in October.

And there is no secret as to why - the fear that the housing boom, and its associated credit boom (much of the money borrowed as "equity release" against the increased value of houses) is getting out of hand.

Although house price increases are slowing, especially in London and southeast England, house prices are still at historic highs in relation to average earnings, and the number of first-time buyers is at an all-time low.

The financial futures markets - where investors speculate about future interest rates - are expecting a rate rise of a quarter-point in the next three months, and nearly one percentage point within 12 months.

New measure of inflation

However, it is by no means certain that the Bank will move beyond a 0.25% correction to the July rate cut - or that rates will stay up instead of fluctuating up and down.

In the first place, the Bank of England has what is called a "symmetrical" inflation target.

That is, it is obliged to cut interest rates when inflation drops below its target level, as well as increase rates when it is too high.

The Bank is not sure how fast the UK economy is actually growing

So far UK inflation has remained remarkably subdued, and if it were to fall further the Bank would have to keep rates low.

In addition, the government has announced that it will be changing the inflation target to a new measure known as HICP (harmonized index of consumer prices) to move into line with EU practice.

The new measure, HICP, usually reports a lower rate of inflation than the current one, RPIX (which has a target of 2.5%), and the government is widely expected to set the new target at 2%.

But, with HIPC currently running at about 1.5%, this may mean that the UK falls consistently below its new inflation target for some time to come - which might be part of a plan by the Chancellor to stimulate the economy as public spending begins to slow down.

Cautious Bank

The imminent change in its inflation target may cause the Bank to be more cautious than usual in changing interest rates before the economic situation becomes more clear-cut - or it may provoke it to act before its hands are tied by the Chancellor.

The Bank cannot be sure how homeowners will react to a sharp rise in interest rates, and does not want to provoke a housing market crash

But it also has another reason to be cautious - since the underlying figures for the growth of the economy have also been substantially revised.

These statistical revisions by the ONS, and further uncertainty over the strength of economic recovery in the US, also mean that the Bank is not sure how fast the UK economy is actually growing.

Although most economists believe it is still expanding at below its economic potential, it appears to growing faster than previously thought.

And there is a third reason for caution, as the Bank's MPC member Steve Nickell has pointed out.

The Bank cannot be sure how homeowners will react to a sharp rise in interest rates, and does not want to provoke a housing market crash that could put any economic recovery into reverse.

So it would prefer to wait for further signs of a housing market slowdown before acting on its own.

All this makes the next few meetings of the Monetary Policy Committee extremely interesting - and more difficult to predict than usual.

The data so far have not given the inflation hawks a clear run to raise rates sharply, but their fears are being given an increasingly firm foundation.

What is clear is that no further rate cuts are on the cards in the near future, and in that sense the interest rate cycle has turned.