Bitter rate rise medicine begins to cool house price fever

The Bank of England's fifth interest rate rise since November took borrowing costs up to 4.75% yesterday, the highest level in almost three years.

While rates may not look high in historical terms, they have now risen by more than a third since the 48-year low of 3.5% at this time last year. The rise means a considerable increase for new home buyers who stretched themselves to afford properties over the past year or two.

The latest rise, assuming lenders match the Bank of England's move, adds £15.71 a month to a £100,000 repayment mortgage, making it £78.55 extra since rates began to go up last year.

By contrast, the European Central Bank left interest rates unchanged in the face of rising oil prices.

With City economists expecting rates to rise to between 5% and 5.5% over the next six months, the Bank is prepared to tighten the screws further.

"We continue to think there will be further rate rises to come, and that consumers should organise their finances to be able to cope with them," said Michael Coogan, director general of the Council of Mortgage Lenders.

Indeed, the Bank's statement accompanying its rate announcement mentioned early signs of cooling in both the housing market and consumer spending.

Rate rises, as the Bank has been hoping, may be starting to bite. House prices have more than doubled in recent years thanks to big cuts in rates, and the Bank's monetary policy committee has been growing impatient that prices have risen strongly so far this year. The bank's governor, Mervyn King, warned in June that prices had risen so far that there was a growing danger they could fall. His words have hit the market hard.

Apart from homeowners, another loser from the interest rate rises is UK plc, which has seen a big increase in its debt servicing costs.

A study from REL Consulting Group shows the Bank's latest quarter-point rise would add £700m a year to the costs of the country's largest 100 companies, which have combined debts of £282bn. Although that can be set against corporation tax, there is a still a net cost to the firms of almost £500m a year, or a cumulative £2.5bn since the Bank began raising rates.

"The recent interest rate rises are going to hit businesses across Britain very hard. Business managers who were beginning to feel that the economic downturn of recent years had been left behind are now facing another threat to their profitability," said REL director Dickie Bielenberg.

The CBI pointed out that, above all, British business appreciates the economic stability which the Bank's monetary policy committee has brought with its interest rate policy since it was set up in 1997.

"The Bank's steady strategy of gradual, well-signalled rises minimises the risk of collateral damage to our exporters and avoids unnecessary shocks," said Ian McCafferty, the CBI's chief economist.

"The continuation of the MPC's steady approach provides the economic stability that firms need and is the best way to ensure interest rates peak at the lowest possible level."

There were signs in data released yesterday that the car industry may also be suffering from higher interest rates. The Society of Motor Manufacturers and Traders said private, non-fleet, car sales were down almost 13% in July from a year ago. Private sales have been heading downward for several months.

The clear winners from the Bank's action are savers, says the Halifax, the country's largest lender.

With many lenders raising savings rates yesterday, 5% is not uncommon, representing a healthy return at a time when inflation is running at 1.6%.