A further rise in interest rates could have "very serious" implications for the UK economy, the British Chambers of Commerce has warned.

The organisation also questioned the Bank of England's decision to increase the cost of borrowing to 4.75 per cent last week, given the uncertainties facing the global and domestic economies.

The BCC's central forecast assumes the base rate will now remain unchanged until the autumn of 2007, and then decline back to 4.5 per cent in reaction to slower economic growth.

It added: "If interest rates are slightly lower than in our central scenario, GDP growth would be only modestly higher. But if the base rate increases to five per cent or higher, the negative implications for the UK economy would be very serious."

The BCC lowered its growth forecast for 2007 to 2.4 per cent, from 2.5 per cent, but said it expected the UK economy to expand by 2.6 per cent this year, rather than the 2.3 per cent it previously anticipated.

The new 2006 forecast is higher than the 2.0-2.5 per cent prediction made by Chancellor Gordon Brown in his Budget in March.

However, the 2007 forecast is lower than Mr Brown's 2.25-2.75 per cent Budget prediction.

The group's first forecast for 2008 pointed to "continued pedestrian" GDP growth of around 2.4 per cent.

The BCC said the higher growth forecast is largely due to the 0.8 per cent rise in the second quarter and the recent revisions to previous GDP figures by the office for National Statistics.

Despite this, David Kern, the BCC's economic adviser, said the UK's economic performance is set to remain mediocre and the Government's aim of achieving a sustained improvement in productivity is unlikely to be realised in the next few years.

He said: "There is a clear risk that tax increases totalling at least £10 billion would be needed in the next few years to meet the fiscal rules, and this will pose a growing threat to business confidence.

"Household consumption growth is set to remain below its longterm average and below the expected growth in GDP."

Mr Kern said the BCC's forecast relied on investment and exports taking over from the consumers as the main UK growth drivers.

"However, this cannot be guaranteed, given the global uncertainties and the fragile state of business confidence.

"Unless investment and exports grow at a satisfactory pace, above the growth in GDP, the UK recovery could go into reverse.

"With imports expected to grow more strongly than exports, in both 2006 and 2007, GDP growth could disappoint, even if exports expand strongly. The slower UK growth we expect in 2007 is due to much lower global growth, and below-trend growth in UK household consumption, partly in reaction to higher interest rates."

In terms of inflation, BCC said modest space capacity in the economy should ensure there was no significant upturn in underlying inflation over the next nine to 12 months.

Inflation was expected to be within a range of two per cent to 2.7 per cent in the next three months, before moving to a lower range of 1.8 per cent to 2.4 per cent.

However, Charlotte Ritchie, policy executive at Birmingham Chamber, said the region's manufacturing sector, which is beginning to recover after months in the doldrums was particularly vulnerable to interest rate rises.

She said: "Interest rates affect all sectors of the economy, but the recovery in manufacturing is still very fragile.

"Already interest rates in the UK are higher than the the rest of Europe, which is making it harder for our companies to compete.

"Any further rises could send the recovery in the wrong direction.

"Companies are struggling to cope with increased energy prices, and what we need now is stability."