Interest rate hikes may hurt, but they are good for you

The quarter-point rise in interest rates, announced yesterday by the Bank of England, will probably not mark the end of the great British credit binge, but it could well mean the beginning of the end. House prices do not seem to be rising as aggressively as they have in previous months, and a new increase in people's monthly mortgage payments will surely reinforce this trend. While a property market crash is in no one's interests, a modest depreciation would certainly be welcome. Too many people have been persuaded by the rock-bottom interest rates of recent years to over-extend themselves on their mortgages.

The quarter-point rise in interest rates, announced yesterday by the Bank of England, will probably not mark the end of the great British credit binge, but it could well mean the beginning of the end. House prices do not seem to be rising as aggressively as they have in previous months, and a new increase in people's monthly mortgage payments will surely reinforce this trend. While a property market crash is in no one's interests, a modest depreciation would certainly be welcome. Too many people have been persuaded by the rock-bottom interest rates of recent years to over-extend themselves on their mortgages.

The Bank of England may curtail the purchasing of expensive houses, but it will have a harder task stopping people piling up the balance on their credit cards. The recent figures that show total UK household debt has reached £1 trillion indicates that Britons are in no mood to stop shopping just yet.

The Bank of England knows very well, however, that incremental changes in interest rates are much better than sharp shocks. The Monetary Policy Committee (MPC) sensibly calculates that when people feel a slight pain due to their debt repayments they will do the sensible thing and start to pay it off.

The British consumer debt is by no means the great lurking danger as is often portrayed. People are taking on more debt because they are making calculations about their employment prospects, the affordability of borrowing and the state of the economy, and are reaching a positive conclusion. They are justified in doing so.

Talk of a new paradigm of permanently low inflation is without foundation, and the present benign situation owes a lot to the fact that manufacturing powerhouses with cheap labour like India and China have boomed in recent years. But the removal of the Bank of England from the hands of politicians has boosted confidence, unemployment remains low, and economic growth is respectable. Indeed, the raising of interest rates is a strong sign that the MPC expects growth to continue.

British consumers and home-owners will feel a degree of pain due to this latest rate rise, but the broad picture is still good. The key is not just to enjoy our good fortune while it lasts, but to ensure it lasts as long as possible.