Mortgage costs are unlikely to fall as inflation hits 3.3 per cent – its highest rate in more than 16 years.

Many lenders have increased the rates on their mortgages this month, with the Nationwide building society putting its deals for new customers up by as much as half a percentage point yesterday.

According to the Telegraph the average rate paid by a new borrower at the UK''s second biggest mortgage provider is 7.65 per cent - 2.65 per cent above the Bank of England''s interest rate.

London mortgage broker David Hollingworth told the paper that Nationwide is not alone and it was likely lenders'' rates would rise again by the end of the week.

When inflation rises more than one per cent above the Bank''s target, which is two per cent, governor Mervyn King must write to the chancellor with an explanation.

In his letter to Alistair Darling, Mervyn King said: "As things stand, inflation is likely to rise sharply in the second half of the year, to above four per cent."

He added: "I must stress that there are considerable uncertainties, in both directions, around this."