Gordon Brown has been told by an influential group of experts that his key economic forecasts for next year are wrong.

The National Institute of Economic and Social Research published its quarterly review of the UK economy on Friday and found that the chancellor overestimated his expectation of growth in 2005.

In a move that will alarm homeowners, the group also recommended that the Bank of England put interest rates up by a full half point at its meeting next month and reported that house prices need to fall by as much as 30 per cent.

The economists' views will be taken seriously by the Treasury and the Bank but are unlikely to spark a panic reaction.

City experts expect only a quarter point rise to 4.75 per cent when the monetary policy committee meets next week.

And Brown has proved critics wrong before, although he did have to downgrade his forecasts in his pre-Budget report last year.

He now predicts that economic growth in Britain will be between three and 3.5 per cent this year and the same again in 2005.

The NIESR agree with the chancellor's forecast for 2004, estimating the final figure will be 3.3 per cent.

However the group forecasts that next year expansion will slow to a pace of 2.7 per cent, significantly lower than Brown's view.

The main difference between the two opinions is the expectation of house price movements.

Brown believes that the market has enjoyed high but sustainable growth that will level out but not crash.

In contrast the NIESR and others warn that, particularly in the over-heated South East, property prices will have to readjust.

"A decline in house prices to long-run levels would knock about a quarter of a percentage point off annual GDP growth between 2005 and 2008," the report said.