Homeowners were last night warned to brace themselves for as many as three quarter-point increases in their mortgage payments in the coming months, after inflation unexpectedly rose to its highest level since 1997.

Opposition politicians claimed higher payments would cause "misery" for thousands of people already in severe debt and would lead to increases in house repossessions and insolvencies.

Analysts predicted that a rise from the current base rate of 5.25% was "certain" when the Bank of England's Monetary Policy Committee (MPC) next meets, on May 10. However, some suggested it could peak as high as 6% by the end of the year.

On a dramatic day for the economy, Mervyn King, the bank's governor, had to pen his first letter to Chancellor Gordon Brown, explaining why inflation had jumped 0.5% in March to hit 3.1%, something he is required to do if the Consumer Price Index (CPI) - the government's preferred measure - varies 1% above or below its 2% inflation target.

The increase in inflation, attributed to price rises in energy, petrol, furniture and food, sent sterling through the $2 mark while the FTSE 100 index, reflecting the impact of higher interest rates on company profits, reacted by falling by more than 60 points.

The economic news came as Tony Blair talked up his cabinet colleague - "name me a better Chancellor since the Second World War" - and Mr Brown faced a Conservative-inspired motion of no confidence over the pensions row. The Prime Minister brushed aside fears over the economy, telling reporters the government's inflation record was "superb".

In his letter, Mr King made clear the bank was "determined" to bring inflation back on target and pointed out that the MPC expected the inflation rate to fall back within target in "a matter of months".

In response, the Chancellor said the MPC had helped deliver a "decade of low and stable inflation". He stressed the government would continue to support its work.

In the short-term, analysts forecast interest rates would rise; the MPC has already increased them three times since last August in a bid to contain inflationary pressures.

Philip Shaw, chief economist at Investec Securities, said the inflation figure made "an interest rate rise a certainty along with the possibility of another rate rise beyond that".

He added: "Our forecast that rates will peak at 5.5% is under review."

Jonathan Said, senior economist at the Centre for Economics and Business Research, noted: "This opens the possibility of rates rising beyond 5.5% after May towards the 6% level."

Graeme Leach, for the Institute of Directors, said: "The case for a further quarter-point interest rate rise cannot be in doubt. It looks like a done deal for the next meeting of the MPC."

At Westminster, George Osborne, Shadow Chancellor, claimed the inflation rise was worrying for the British economy and terrible news for Mr Brown, whose reputation for economic competence was, "unravelling before our eyes".

Vince Cable, for the Liberal Democrats, pointed out the inflation rate for homeowners was worse because the CPI did not include the "rampant inflation" in the housing market. The Retail Price Index, which does include mortgages, also rose in March from 4.6% to 4.8%, a 15-year high.

Mr Cable pointed out further interest rate rises would, "cause misery for thousands of people in severe debt who have borrowed up to the hilt to secure a mortgage".

Tony Woodley, leader of the Transport and General Workers Union, said: "Employers had better get used to the idea that our pay claims this year are aimed at winning workplace victories on pay so that workers can afford to meet their rising living costs."

Brown Accused