If The Bank of England's predictions are right rates would be at their highest since September 2001. So what would this mean for consumers, businesses and the wider economy?

Well a rise to five per cent would be good news for those with savings, but it would obviously hit those with mortgages, loans and credit card bills as it would make repayments more expensive.

Reports suggest that more people are saving than ever before, spurred on by news of a deepening pensions crisis. But with personal debt also rising fast, indeed standing at record levels, higher interest rates could have a harmful effect on the finances of those in arrears, and could also hurt the banks who are seeing increasingly high levels of bad debt.

As for the housing market, which has been booming for some time, a rise in rates would no doubt have a gradual cooling effect. Indeed Martin Ellis, chief economist at Halifax, told the Financial Times that higher interest rates coupled with expensive utility bills would curb housing demand and cause annual house price inflation to ease.

But an interest rate rise takes some time to filter through, and since house prices are still extremely high, with the average home now costing £181,186 according to Halifax bank, affordability conditions are likely to remain poor for first time buyers struggling to get onto the housing ladder.

That's why Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, advises first time buyers on a tight budget to consider opting for a fixed-rate deal in order to secure themselves against potential rate rises.

In terms of consumer spending, a recent survey by the Confederation of British Industry showed that despite August's surprise rise in interest rates spending held up well during the third quarter of the year.

However, if rates were to rise to five per cent in November consumers could find their disposable incomes stretched, especially if energy prices continue to rise, and as a result retailers could face a tough Christmas.

But while it looks as though a further interest rate hike is on the cards by the end of 2006, economists believe they will go no further, and that the Bank of England will in fact begin to bring rates down again into 2007 as higher borrowing costs have the desired effect on inflation.


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