Contrary to expectations, the one thing the euro now means to many Irish people is a combination of rising inflation and interest rates. That unholy combination was of course meant to be a thing of the past.

The euro, we were told, would tie the unruly Irish economy into the German model, the Republic would benefit from German-style low inflation and low interest rates. That would boost business and consumer confidence, and the economy could continue growing strongly.

But of course the opposite has happened, or has it? Interest rates have been rising for quite some time now. But it was only October 1998 when rates were at 6.25 per cent. At that time many believed the Central Bank was holding Irish interest rates artificially low, knowing that a big shock adjustment once we entered the euro could do more harm.

But over that three months as we entered the euro, rates fell to an all-time low of only 3 per cent. Following the Asian crisis, rates fell as low as 2.5 per cent, a rate so low it would have been laughable a year earlier.

Now rates are rising towards 5 per cent, but historically that is still very low. Indeed, it should only be those who have taken out loans over the past 20 months who should see much of a rise in their repayments from levels that were previously considered affordable.

With wage rises of around 5.5 per cent now kicking in, as well as large-scale tax cuts, returning to the sort of repayment rates considered normal only a couple of years ago ought not to be a problem. Even if interest rates reach 5.5 per cent over the coming year, as many commentators predict, it should not make too much difference.

In addition, with the booming economy, earnings growth of at least 5.5 per cent this year and employment rising by around 6 per cent, there are unlikely to be any affordability problems on a macro scale. Even high inflation should not erode the overall affordability position, particularly when tax cuts of 4 per cent to 5 per cent are taken into account. Most people, even those on the largest mortgages, should remain better off. Of course, as Mr Jim Power, chief economist at Bank of Ireland, points out, most borrowers adjust quickly to lower repayments. Many will now have additional expenses that account for the difference and, as a result, increasing borrowing costs will make a difference to them.

For those who have taken out loans last year, the effect may be more marked. Many young borrowers, in particular, may have really stretched themselves to take out loans, with repayments carefully worked out. These people may find it more difficult to meet their new repayments.

Many who would be vulnerable took out fixed loans, and nearly all will have benefited from larger-than-expected wage rises and tax cuts.

But there are many people who will feel the effect. Lenders privately say that some prospective borrowers are budgeting to live such modest lifestyles that it almost beggars belief. Many have no holiday budgeted in and no car or childcare expenses. Yet these are people who drive a nice car, do take holidays and are in the age-range where having babies is a possibility.

Mr Martin Walsh, head of lending at EBS, says averages hide all sorts of variations. He points out that, if someone borrowed £100,000, the two percentage point increase in interest rates would mean additional repayments of some £2,000 a year, or after-tax income or around £170 a month.

For many people that may not be a problem, he says, but there are many others who may have around £1,000 a month after their mortgage repayments, and such a jump in repayments would make a large difference to their standard of living.

"It is a further blow to affordability for those who have pushed themselves to the threshold," he said.

Nevertheless, rising interest rates are unlikely to mean any large-scale defaulting on bank loans, never mind the spectre of returning of keys, which accompanied the large interest rate rises in London in the late 1980s.

Normally, rising interest rates could be expected to dampen the housing market, but so far there is little evidence that that is likely to happen.

There are countries in the euro zone that have benefited from low interest rates - some catch-up and rapidly-growing economies, particularly Finland. But none have come close to matching the escalation in Irish property prices, perhaps because they do not suffer from the same supply problems.

According to recent data from the Bank of International Settlements, the increase in residential property prices in the Republic from 1995 to 1999 was 85 per cent ahead of Finland and the Netherlands. In the commercial property sector, Dublin saw prices increase by 171 per cent from 1995 to 1999. This rise was 63 per cent greater than Madrid. That city saw commercial property prices rise by 105 per cent in the period.

But the report also found that it was the strength of the economy that had tended to be the driving factor in real estate price gains. Indeed, among industrial countries, Ireland had the strongest property market between 1995 and 1999, and Japan the weakest.

As a result, it is unlikely that property price rises will slow much simply because rates have increased, although the impact on the psychology of the marketplace may be more marked.

The cost and availability of affordable housing will remain a disincentive for prospective employees. Many companies are finding it more and more difficult to recruit. This applies to jobs ranging from fund management to universities, from telesales to nursing, where employees believe they simply cannot afford to come to Dublin.

According to Dr Dan McLaughlin, chief economist of ABN Amro, interest rates would have to rise to 6.5 per cent to have any really serious impact on housing market.