Talk of global deflation and European recession has now been consigned to history. Yesterday's half percentage rise in interest rates means that the European Central Bank (ECB) is fully convinced that the European recovery is firmly on its way, helped by a turnaround in Asia and ongoing growth in the US.

The ECB's decision means the end of historically low mortgage rates for Irish borrowers, although further rises over the coming year are likely to be modest. Official rates now stand at 3 per cent and, according to analysts, are likely to be just under 4 per cent at this time next year. That is of course still very low by historic Irish standards.

The main reason euro-zone rates have been so low over recent months is the financial turmoil in the Far East last year. The US Federal Reserve was the first to cut rates as a response to the crisis in the Far East in summer 1998 and the ECB began the process later when it reduced rates by a half percentage point in April. This was seen as almost an emergency cut in response to the still worrying global environment and it has now been taken back as the outlook improves markedly.

But most analysts believe rates are now likely to stay at their new levels - for some months at least. It is true that Asia is undoubtedly picking up while the French economy is, without question, moving out of recession. It is even possible that France will be the second-fastest-growing economy in the euro zone next year. Indeed, it was only continuing slow growth in Germany and Italy which prevented a rate rise over the last couple of months. Giving that recovery a chance to put down roots will mean that rates should be left where they are for some time.

It is certain the ECB president, Mr Wim Duisenberg, had the backing of key Italian and German board members when the decision was taken to raise rates, particularly by an aggressive half percentage point.

Economists point out that the fundamentals of the German and Italian economies still do not justify interest rates of 3 per cent. However, it is possible that Mr Ernest Welteke, the Bundesbank president, takes the view that a larger rise now is likely to put a real cap on inflation and should ensure that rates will have to rise by as little as possible over the next year.

Certainly there is as yet little sign of consumer prices picking up; they are nowhere near the ECB's maximum permitted level of 2 per cent. Average euro-zone inflation was only 1.2 per cent in the 12 months to September.

But even the Germans and Italians are thought to be worried that low interest rates could boost asset and particularly housing prices in France and Spain. That in turn could lead to higher wage demands which would feed through to higher inflation. Yesterday's rate rise, it is hoped, will put a stop to this process.

Certainly Irish banks and building societies are likely to pass on the rate rise far more quickly than they did the previous rate cuts and in the process possibly slow down house price increases. EBS, traditionally the cheapest lender, has said that it will be pushing up interest rates now - probably by almost as much as half a percentage point. The banks are likely to announce their decision today and at the beginning of next week and rises of between 0.3 per cent and 0.5 per cent are likely.

Even the Bank of Scotland, which cut its rates only last week, is actively reviewing this policy. It borrows in euros for its Irish lending so the rise by the ECB raises its cost of funding, just as it does for the Irish lenders. Indeed in Britain the Bank of Scotland reacted very quickly to yesterday's interest rate rise from the Bank of England. The Bank of England put up rates by a quarter of a percentage point to 5.5 per cent which provoked a quarter-point rise from Bank of Scotland. The Bank of England was also reacting to continuing rises in house prices.

At the moment the cheapest variable rate in the Irish market is Bank of Scotland's 3.69 per cent, followed by 3.85 per cent from the EBS.

If the lenders have their way, the ECB decision will mean variable mortgage rates of some 4.3 or 4.35 per cent next week. According to Mr Martin Walsh, head of lending at EBS, it is inevitable that most, if not all, the rise will be passed on to borrowers.

Mortgage rate rises of that order would mean an additional £22 (€28) a month on an £80,000 loan with repayments of around £500.

Fixed rates are also likely to rise over the coming weeks. According to Mr Richard Hoare, general manager at First Active, an increase in the variable rate of half a percentage point can be assumed. However, he also added that the cost of fixed-rate funds has been rising for some time and there will also be an "adjustment" in fixed-rate funding.