In the end of an era, the Bank of England yesterday (Thursday 6th Nov) confirmed what millions of homeowners had feared, when it announced that the interest rate would rise from the historically low 3.5 percent to 3.75 percent.

The 3.5 percent rate was the lowest for 48 years and a rate rise has not been seen for almost four years when it went from 5 percent to 6 percent an a series of quarter-point raises in winter 2000/2001.

The end of an era? The last time interest rates were at 3.5 percent was for just a month between 27th January and 24th February in 1955. Previously they had been at 3.0 percent for just 8 months since May 1954.

Most analysts say the housing market is robust enough to take the 0.25 percent hike. People have been expecting a rise anyway and those that consider themselves vulnerable can still obtain fixed-rate deals.

John Wriglesworth, housing market guru and Hometrack Economist says: “Those predicting the increase in the base rate will cause chaos in the housing market are forgetting the 1980s and the 1970s. During these two decades, base rates rose as high as 17%. The country didn’t see the base rates fall below 5% from these highs until September 2001.”

“Typical mortgage repayments as a percentage of household income averaged 21% in the 80s, then 22% in the 90s (source: Halifax). At 3.5%, this ratio stood at approximately 13%; the effect of the rise will increase the ratio to only 14.0% - still exceedingly low by historic standards.”

“With lenders being more flexible with respect to multiples of income and with an increasing number of innovative mortgage products targeted to make house purchase more affordable, especially for first time buyers, we continue to be optimistic that the housing market will remain in a healthy state.”

“House prices will continue to rise for at least the next 18 months. Our forecast for house price rises for 2004 is 4%, assuming no more major interest rises and provided the Chancellor does not do something silly in the Autumn Statement, like raising stamp duty.”

Milan Khatri, Royal Institution of Chartered Surveyors (RICS) chief economist, said:

“Highly-mortgaged homeowners will swallow today’s small rise, but the Bank of England (BoE) cannot afford to take it too far, too quickly.”

The quarter percent rise in interest rates will have little impact on the housing market, but an upward trend will slow it down, said RICS. The interest rate rise, a correction which takes us back to where we were in July this year, will only have a muted impact on housing demand as employment remains firm due to strong government spending.

“We would advise the BoE to hold back on increasing interest rates further until they have established whether a genuine economic recovery is underway,” continued Milan Khatri.

“There have been many positive indications from the service economy and on consumer spending in recent months. However, manufacturing activity and exports, continue to be quite disappointing and therefore warrant caution over the outlook, particularly as the BoE will be looking to both areas to support the economy in the next year.”

RICS believe that the low inflation climate provides the BoE with the leeway to await confirmation of a broad-based rebound in the UK economy, before implementing a further monetary tightening.

Peter Bolton King, National Association of Estate Agents chief executive, said:

"There have been concerns that many households have over-borrowed and certainly mortgage lending hit a record level in September. But the NAEA is not concerned that this rise will damage the market.”

"The market is still going up by about 2% a month but we predict a far slower rate of growth next year and an orderly market. We see no reason why interest rates should climb further and believe the housing market will remain steady."

Peter Brodnicki, Chief Executive of Mortgage Advice Bureau said: "This rise in interest rates will not have a huge effect on the current housing market and borrowing. This is the first interest rate increase in the cost of borrowing for almost four years and with the rate at a 48-year low this 0.25% increase will not really effect the public, who were largely expecting this increase anyway and have benefited from this low rate for longer than originally anticipated.

"I expect a slight increase in re-mortgaging as borrowers consolidate their debts, but it will not curb consumer spending, which would only be effected by an increase of over 1%. However with economic prospects continuing to improve, further interest rate increases will occur next year. Homeowners not benefiting from discounted or long term fixed rates will continue to remortgage to find the most competitive deal."

The NAEA’s outlook that further interest rate rises are unlikely is a rare view. Most analysts expect further rises next year and with a ceiling of around 5 or 5.5 percent by late next year.

The Bank of England clearly indicated it had run out of patience with the housing market and consumers who continue to spend and pile on debt at a furious pace, saying in its press release yesterday, "Neither household spending nor the housing market have slowed by as much as the Committee expected."

"Underlying inflationary pressures are therefore likely to build gradually as demand strengthens and sterling's depreciation earlier this year feeds through," it added implying that further rate hikes are being considered.

Economists polled by Reuters immediately after the decision predicted that the Bank would next raise rates again in February to 4.0 percent, followed by another quarter-point move shortly afterwards.

Nationwide, the country's largest building society, responded immediately by saying said it would raise its base mortgage rate by 0.35 percent to 4.89 percent, with rival lenders including HBOS, Abbey National and Bradford & Bingley saying they were putting their loan rates under review.

The last time the Bank of England announced a rate change lenders took a few days before implementing rate cuts but this rise had been expected so lenders had time to decide their strategy.

The Halifax bank said that the quarter point rise would add around four pounds a week to the average £80,000 mortgage.

And the National Association of Estate Agents said this weeks rate rise will cost someone with a £100,000 repayment mortgage over 25 years under £15 a month.

Both these expectations are based upon a 0.25 percent rise but lenders may follow the Nationwide and put up rates beyond the quarter point.

Whilst many highly-mortgaged homeowners may take this weeks rate rise on the nose, many people struggling with low salaries, first mortgages and credit card loans will feel the pinch straight away. The average increase is expected to be about £9 a month.

Cash-strapped families who have taken the option of fixed rate mortgages will have a smile on their faces this morning, particularly when considering the potential for more rate increases next year.

The Nationwide hike of 0.35 percent was clearly meant to encourage savers back, although it has to be said that the lending rate was very competitive.

Savers with bank accounts that track Bank of England base rate moves will be happy with Thursday's rate rise.

A number of banks and building societies such as Egg, Abbey National, Bradford & Bingley and Capital One provide accounts guaranteed to pay a rate equal to the base rate. These accounts will increase their rates immediately.

CBI Director-General, Digby Jones, said: "Business is glad the Bank is putting long-term economic stability first. This rate increase is understandable providing it represents no more than a reversal of July's precautionary cut and not the beginning of a swift upward movement.”

"Despite more encouraging world growth, we should be clear that the economic recovery is still at an early and extremely fragile stage. It would be misguided to opt for overly aggressive monetary tightening before that recovery has really taken hold.”

"That is why the whole business community - not just manufacturers - will strongly resist any suggestion of a series of rapid rate rises."

The Institute of Directors also welcomed the rate rise saying that it thought the increase in public borrowing had gone on for too long anyway.

However not all industry felt the same way and the British Chambers of Commerce was concerned after receiving new industrial output figures that indicate a stalling in Britain’s fragile manufacturing upturn.

David Kern, Economic Adviser to the British Chambers of Commerce, said:

"There is a clear risk that the fragile recovery will fizzle-out altogether unless it is nurtured and supported. The deep-seated forces that have caused prolonged manufacturing weakness in the past few years still pose a threat, and it is vital to ensure that, on this occasion, the sector's upturn is not blown off course.”

"The clamour for early interest rate increases is clearly unjustified,” Kern said, “…any consideration of further interest rate increases should be delayed until the economic situation is and the manufacturing recovery is more secure and firmly based. Even more critically, any thought of higher taxes on business must be entirely off the radar screen."

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