Inflation: Effect of a rate rise on: The finances of consumers

SOME consumers feel changes in official interest rates long before they happen, as they take up deals based on rates quoted in the wholesale money markets, writes Vivien Goldsmith.

Mortgage borrowers looking for a fixed rate have known for about three months that interest rates are on the way up, while those riding the uncertainties of variable rates have been on constant monthly payments.

The standard variable rate is 7.74 per cent. Although borrowers can still find a rate below that for a two-year fix, beyond that time frame, rates begin to climb.

NatWest offers two years pegged at 6.99 per cent, three years at 7.79 per cent, five years at 8.59 per cent, 10 years at 8.99 per cent and 15, 20 and 25 years at 9.19 per cent.

This gives a clear picture of the way the money markets predict that rates are going to climb. It gives borrowers the choice of paying a lower rate for short-term protection from higher rates or paying more for longer-term certainty.

On the other side of the equation, building society investors are now being offered stepped interest-rate deals - if they are willing to tie their money up for four or five years. Birmingham Midshires, for instance offers 5.75 per cent this year rising to 10.75 per cent in four years, in anticipation of higher rates.

The rates on guaranteed income bonds, which rely on the futures market, have also begun to rise .

Some savers on standard variable rates have actually seen interest rates shaved recently, as societies retreat from wildly generous rates designed to stem cash outflows.

But most retail deals will react to an actual change in interest rates. Very few rates are pegged to bank base rates. Even overdrafts, which used to be quoted as a certain percentage above base rate, have now gone over to 'managed rates'. This gives the banks - and building societies running current accounts - the opportunity to adjust margins every time rates change.