With UK rates already rising and US rates set to begin their upward movement, it's just a matter of when and how much for euro rates, writes Cliff Taylor, Economics Editor.

The only way is up. The move by the Bank of England to increase interest rates again yesterday points the way to an upward trend internationally.

The pace of UK rate increases also shows that once rates start rising, they can do so quickly. However, if the big central banks do their job properly, then the peak of interest rates in the forthcoming cycle should be a good deal lower than we have seen in the past.

The US Federal Reserve Board (Fed) has prepared the way to increase its rates at the end of this month and European Central Bank rates have also bottomed out. An increase in ECB rates - and thus rates for Irish borrowers - is still some way off, but as international growth picks up borrowers must now start to budget for an upward trend.

Central banks in the main economies all cut rates over the past few years to try to boost economic growth. Fears of deflation - a disruptive period of generally falling prices - led the Fed to be particularly aggressive, cutting its key funds rate to a 45-year low of just 1 per cent. Earlier this week, speaking in his usual delphic fashion, Alan Greenspan, the Federal Reserve Board chairman, said that its policy-making board believed that "monetary policy accommodation can be removed at a pace that is likely to be measured".

This already nuanced statement was hedged around with enough "ifs" and "buts" to mean whatever 'Mr Greenspan wants it to mean as events unfold. However, his tone left the markets in no doubt that the Fed will make its first upward move at its next meeting on June 30th.

While it is likely to hold off in the immediate run up to November's presidential election, US rates are so low that once they start to rise the increase could be rapid enough. After all, even if rates rise to 1.5 or even 2.5 per cent, they would be at a level that would still stimulate growth in an economy already growing rapidly.

Goodbody Stockbrokers predict that the Fed could increase its funds rates to 2 per cent by the end of this year and to 4 to 4.5 per cent by the end of next year, pointing to a period of significant tightening in 2005. Forthcoming US inflation figures will determine the pace of increase. At the moment most bets seem to be on a 0.25 of a point increase to kick- off on June 30th.

The Bank of England, meanwhile, is already well into its interest rate increasing cyclical. The first increase came last November and including yesterday there have been four 0.25 of a percentage point increases, bringing UK base rates from 3.5 per cent to 4.5 per cent.

The bank's move signals the increasing confidence of central banks that the recovery is now under way, according to Austin Hughes, economist at IIB. He also argues that "it suggests that once tightening begins elsewhere, the process could be more rapid than envisaged by markets".

Until yesterday's increase, there have been modest 0.25 of a point rises at quarterly intervals. Now, with fears about the dangers of rising UK house prices and increasing borrowing, the Bank of England has moved twice in two months.

Like the UK, the Irish housing market is showing signs of overheating and borrowing here is increasing at an extraordinary annual rate of 27.4 per cent. There is no doubt that if the Central Bank of Ireland were still setting our interest rates they would be a good deal higher than they are now. However, part of the argument for joining the single currency was the promise of permanently lower and more stable interest rates, which would go lower at the base of the cycle and not rise as high at its peak.

Certainly, as monetary union started up, the borrowing costs in the lowest-rate countries were effectively exported across the euro zone. Now the question is how the ECB will manage at a time when the international rate cycle is moving up, but growth in the main euro-zone economies remains very sluggish.

The ECB, keen to underline its anti-inflation credentials, has resisted calls to cut rates below their current level of 2 per cent, despite the faltering performance of the big euro-zone economies, particularly German.

Given the upward move internationally, any thoughts of a further ECB cut now appear to be off the agenda, barring a big slump in growth. The ECB will be particularly keen to move before expectations of a significant pick-up in inflation become entrenched. Many analysts believe that the first increase in euro-zone rates may not come until next year. However, Pat McArdle, economist at Ulster Bank, says that an increase could come from Frankfurt earlier than expected, quite possibly before the end of this year.

This is the bad news for borrowers, of course. However, Mr McArdle points out that the peak of the forthcoming cycle will be a good deal lower than we have seen in the past. He believes that ECB base rates could rise in the region of 2 percentage points, bringing the ECB base rate from 2 to 4 per cent. This would bring the average mortgage rate from 3.5 per cent now to 5.5 per cent or perhaps slightly more over the next couple of years.

Mr McArdle points out that this is still below the 7-7.5 per cent average mortgage rate that prevailed in 1994-1998, the four years before monetary union. Nor do we now face the risk of the kind of currency turmoil that drove rates as high as 14 per cent by the end of 1992.

Higher rates will, of course, mean increased repayments for mortgage borrowers. Central Bank research has suggested that on average borrowers are not over-extended, but there is considerable debate as to the position of more recent borrowers who have taken out very large loans to try to get a foothold in the property market, or to trade up in a market where prices continue to soar. Mortgages of €500,000 are not untypical now, involving repayments of a hefty €2,400 a month, rising by about €280 for every percentage point increase in interest rates.

Mr Alan Morton of advisers Moneywise believes that most borrowers will cope if rates rise to 5 per cent, but some could start to struggle if they went much higher.

And research by Mr McArdle shows that affordability for most borrowers remains manageable, given the lower level of interest rates, longer borrowing terms and lower taxes.

Despite this, however, higher rates will clearly increase the stress - and vulnerability - of the more highly borrowed.

They can only hope, having benefited from the low point of the euro interest-rate cycle, that promises that the single currency would bring permanently lower and more stable rates are fulfilled.