Analysis: The increase in fixed interest rates by a number of the lending institutions signals that longer-term interest rates are gradually on the rise, having fallen to historic lows in early summer, writes  Cliff Taylor, Economics Editor.

However, borrowers on variable rates are not likely to face any increase until well into 2004 - and a further small reduction cannot be ruled out if the euro-zone recovery does not start to gather pace.

Interest rates have fallen to historic lows in recent months as international monetary authorities reduced borrowing costs in a bid to spur recovery and investors reacted to deflationary fears. This pushed short-term variable mortgage interest rates to their lowest levels in half a century and also led to falls in longer-term fixed rates.

Longer-term interest rates - expressed as the yield on Government bonds - have now started to edge up. These rates reflect investors' perceptions of what inflation and interest rates will be in the medium to long term.

Expectations that the US economy has started to recover and that the US Federal Reserve is becoming less concerned about deflation have led to a bounce in US bond yields over the past month or so. Ten-year US interest rates, for example, have risen from a June low of fractionally more than 3 per cent to just less than 4.25 per cent now, while interest rates for shorter terms such as two or five years have risen less dramatically.

Euro-zone long-term interest rates have followed this trend, with many rising by around half a percentage point since June.

The financial institutions raise money by borrowing in the market at longer-term fixed rates and then lend this money on to their customers in fixed-rate products. (Many also raise money through savings products.)

As the cost of longer-term borrowings rises, the institutions are now seeking to pass the cost on to their customers by pushing up fixed interest rate borrowing costs.

With growth prospects uncertain, the extent of the increase to new fixed-rate borrowers should be limited for the moment. And those who are on variable mortgage rates look unlikely to face any increase until some way into 2004, with a possibility that the European Central Bank could yet trim short-term rates again in the interim if euro-zone growth figures are very poor later this year.