LAST week’s hike in interest rates brings the Bank of England base rate back to historically normal levels.

But for millions of homeowners, it heralds significant increases in the cost of owning a home. We have all got used to the last 15 years of super low interest rates.

The rise in interest rates is a response to inflation. The Bank of England is charged by parliament to maintain inflation at a rate of two per cent.

This was set by Gordon Brown when he was chancellor back in the late 1990s.

By not changing this target, confidence in the UK economy has maintained.

But the only tool is that of interest rate control, through the base rate (for very short term borrowing) and quantitative easing (for long term rates, and when short rates are super low).

Hiking interest rates tightens the supply of money. Borrowing costs go up, freely available money is in shorter supply, so consumers become more sensitive to prices and thus inflation comes under control.

This is basic monetary policy and it explains why Liz Truss’s disastrous budget last year – that cost her her job – was so wrong with tax cuts.

The pain is severe for many people. Buy-to-let investors are selling up, whilst the cost of a mortgage implies downward pressure on house prices.

The sooner we get inflation under control, the better and then rates should start to fall again.

But there are other pressures that need to be tackled. The prime minister has indicated that pay rises for public sector workers will not be at the suggested six per cent.

This appears to be unfair. Our public sector workers are suffering from inflation, so why not help them?

The reason is that increasing money supply (through public sector pay rises) whilst the Bank of England is trying to tighten it will inevitably result in a further hike in interest rates. So we can put up public sector pay, but at a further cost to home owners interest payments. There might also be a tax implication, too.

I do not underestimate just how grim this is for everyone, one way or another. Some say the BoE should have hiked rates earlier; I say that money printing QE has been a major contributor of hot money supply.

Whatever the reasons for us being here, getting inflation under control is a top priority, otherwise the value of what we do have simply evaporates.