MEMBERS of the Bank of England’s Monetary Policy Committee have been agonising over the past two months over whether to put short-term interest rates up again.

This seems on the surface to prolong uncertainty about the likely level of mortgage rates, in particular. In reality, it does the opposite. It tells us that, unless economic realities change unexpectedly, rates will not move a lot.

The best bet this Easter is that base rates will edge up one more notch, from 4.75 per cent to 5 per cent, in spring or summer, but will stall at that point. For much of the rest of this year, therefore, short-term fixed-rate mortgage offers are likely to be set by lenders on the assumption that base rates will not be higher than 5.25 per cent for some time.

Received wisdom is that we are in a period of rising interest rates. But that is more true abroad than at home.

The European Central Bank, which has held its rate at 2 per cent for the best part of two years, has made plain that its next move will be upwards. It has been saying this for some time while economic growth prospects in the eurozone heartland have faded from pastel to drab, so any changes in the immediate future are likely to be modest.

Alan Greenspan’s US Federal Reserve Board slashed its wholesale money rates all the way down to 1 per cent in the summer of 2003 to help to lift the US economy out of its post-bubble recession. He started raising the cost of money back to more normal levels in July last year. There have since been seven quarter-point rises. The latest move to 2.75 per cent came this week and the Fed made clear that it would not be the last.

In the UK, we are at a markedly later stage in this process. The Bank of England started tightening in November 2003, after base rates bottomed at 3.5 per cent. Five rises followed over the next ten months, but there have been no rate increases since August. That is just one month after the Fed started its tightening phase.

August was the month when UK house prices started falling, or at least stopped going up, according to which index you follow. That has been the key factor persuading the MPC to sit on its hands since.

The Bank was afraid that even a modest further tightening could trigger the feared house-price crash, assuming that did not happen of its own accord. In the past, many will remember, stable house prices have been rather a theoretical concept down at the estate agents. Prices were either chasing up or sliding down.

The MPC does not specifically target house prices in setting interest rates. But it knows that they influence consumer spending, which accounts for two thirds of the economy. Since the millennium, as house prices have gone up and up, equity withdrawal to feed spending has multiplied. First it rose from £20 billion to £40 billion and then, in the year to summer 2004, to £60 billion.

Releasing rising property values into consumption at that pace could add about 4 per cent to total spending. Yet only ten years ago, people were having to inject £5 billion out of possible spending money into their housing equity to make good the traumatic losses of the early 1990s.

The crash has not happened. Minutes of the MPC’s latest meeting confirm that sharply falling house prices are no longer thought to be much of a risk. But consumer spending has moderated anyway. That may be an independent response to higher tax deductions and warnings about credit card debt. It could also reflect the housing market. Equity withdrawal has been shrinking. So has the number of transactions and, therefore, the previously buoyant demand for new tiles, wallpaper, kitchen cabinets and sanders.

If consumer spending weakens more, the next rate move could be down. One upside risk is that unemployment falls so low that earnings growth suddenly accelerates sharply, but that seems unlikely as long as Asian doctors and Polish craftsmen are happy to help us out. The other is that the housing market recovers too fast and house prices rise at 1 per cent a month again. The more people realise this, the less likely it is to happen.

The best outcome for domestic markets and UK company profits would be for interest rates to stabilise at about 5 per cent, for output to expand at its trend rate of about 2.5 per cent and, once first-time buyers have been priced back in, for house prices to rise at slightly less than 5 per cent in line with earnings.

Share prices have other influences to bother about. In a global financial market, share indices are likely to suffer from rising US short-term interest rates as well as benefiting from rising US profits. America’s twin budget and trade deficits, along with heavy borrowing in the UK and the eurozone, are also liable to push up long-term rates on the bonds that pension funds have so eagerly lapped up. At least the funds are now buying shares again.