Key bank borrowing rates will start to rise here from next summer and will continue to climb by the end of 2011, Morgan Stanley has predicted.

The global investment bank forecasts the European Central Bank (ECB) will raise rates in the third quarter of 2011 by a quarter-point to 1.25% and they will continue to increase, leaving rates at 1.5% by the end of the year.

The rate increase will bring a sharp end to the cumulative 3.25% cut in rates the ECB has sanctioned since the start of the global economic and banking crisis. The central bank last moved in May last year when it cut rates by a quarter of a percent to an all-time low of 1%.

A rise in official rates will hit thousands of Irish tracker mortgage borrowers whose home loan repayments are pegged to ECB interest rates. Banks here have already dramatically increased their interest rates to home loan borrowers on variable rates.

In its latest global markets outlook, Morgan Stanley predicts other central banks, except for the Japanese central bank, will also start to increase their official interest rates next year.

Most dramatically, the economists predict the Bank of England will increase its key rate at the start of next year to 1% from 0.5%. British interest rates will then climb to 2% by the end of 2011.

Key interest rates in the US, now at only 0.125%, will start to rise too. The US Federal Reserve, which last cut rates in December 2008, will rapidly hike key interest rates to 2.5% by the end of next year, Morgan Stanley predicts.

Irish economists here also predict that the world's central banks will start increasing interest rates.

Alan McQuaid, chief economist at Bloxham Stockbrokers, said the ECB will make its first delayed move to increase interest rates in the first part of next year.

"It has delayed raising rates because of the debt crisis, the banking liquidity crisis and because eurozone economies are still quite weak and there is no inflation risk," said McQuaid. The ECB will start increasing rates by successive steps of 25 basis points (0.25%) in each quarter, he said.

McQuaid said this weekend's gathering of leaders from among the world's 20 largest economies will show up sharply the lack of consensus in the G20 about the best ways of tackling the world recession.

Austerity budgets that aim to cut government deficits below 3% of GDP by 2014 will do more harm than good, said McQuaid.