ANOTHER rise in interest rates is still on the cards despite inflation falling to its lowest level in seven months.

Falling energy prices saw the Government's official measure of inflation (the Consumer Prices Index) ease to 2.5 per cent in May from 2.8 per cent the previous month.

Even though the fall in inflation was bigger than expected, it was not enough to prevent analysts from forecasting another rate rise.

The Bank had previously predicted that one more rise in interest rates to 5.75 per cent would be necessary to bring CPI back to its 2.0 per cent target. Most experts have been pencilling in the rise for July or August.

On Tuesday night Bank governor Mervyn King said "further action" on interest rates could be necessary.

Standard Chartered economist Gavin Redknap said the latest data may add weight to the view that one more rise would mark the peak.

"But the message delivered by King appeared to warn explicitly that rates will go much higher still should the Bank deem it necessary."

Mortgages are already at their least affordable level for 15 years as a result of recent interest rate hikes, warned the Council of Mortgage Lenders.

CML bosses said first-time buyers in April were paying 18.7 per cent of their income to cover mortgage interest payments.

That is the highest level since 1992 and is up from 16.3 per cent for the same period a year ago.

Conditions are to worsen as May's base rate hike gets absorbed into the data, said the CML. And in what the lenders' association described as a "double whammy" for first-time buyers, increasing numbers are also being caught by stamp duty.

In April, 58 per cent of first-time buyers were forced to pay the tax on their home, up from 51 per cent in the same month last year.

CML director general Michael Coogan said: "Month on month we see affordability constraints for first-time buyers worsening.

"And with the impact of May's interest rate rise still to be felt, many borrowers face higher costs in the coming months."