Traditionally, higher interest rates are believed to be bad news for equity investors, because as corporate borrowing costs increase, so profits inevitably suffer and share prices fall.

The equally painful flip side of this theory is that as interest rates rise, consumers have less to spend on goods and services, which means that business volumes suffer and plans for corporate expansion are shelved. Discuss.

Only joking, although the recent 0.25 per cent increase in bank base rate undoubtedly represents a double whammy' for indebted companies in particular.

Pay pressures may have receded over the past few years, but non-wage employment costs have surged as a result of higher National Insurance contributions and burgeoning pension expense.

An increase in the cost of borrowing will add to the hurt felt by some organisations.

Most of us, companies included, have grown used to lower interest rates, despite frequent warnings from economists who maintain that the true neutral' base rate should be between 4.5 per cent and 5.5 per cent.

In other words, they are designed to neither stimulate nor restrain the economy, so it will come as no surprise to discover that many economists suggest rates could rise further by next spring, quite possibly to 5.5 per cent.

Does this mean it is time to cash in our share holdings, pack the bags and head south? Not quite.

Remember, the incentive for investors to buy equities is a function of the market's anticipated rate of return.

Should this sentiment be favourable, investors will move money from a bank, where they earn risk-free interest, into shares, where they can potentially benefit from a combination of dividends and capital growth.

When interest rates rise, the flow of capital is believed to be in the other direction, although some timely research suggests this is not necessarily the case.

Over the past ten years, base interest rate movements have mirrored the performance of the FTSE100. As rates have increased, so share prices have moved higher and as rates have fallen, so too has the market. One of the principle reasons for this is equity investors' collective ability to anticipate the direction of interest rates.

The recent rate hike took few investors by surprise; it was merely the latest in a series of upward movements that commenced back in mid-2003. Look at what has happened to the FTSE100 over the same period as interest rates have headed up, the index has surged.

Similarly, as rates tumbled between 1998 and 2003, so the stock market fell markedly. Conclusion? Well-signalled rate changes appear to remove a crucial element of uncertainty for investors.

Appear to?' Well, yes, because account has to be taken of the manner in which the FTSE100 is weighted towards the stock market's big beasts, few of which carry the costly burden of heavy borrowing.

The market capitalisations of the ten largest UK companies account for approximately one third of the FTSE100 index.

It follows that if they appear unaffected by interest rate rises, so do the rest.

And there's the rub. Companies such as Vodafone, AstraZeneca and HSBC can shrug off the debilitating effects of higher interest rates as they tend not to be substantial borrowers.

By contrast, smaller companies, many of which are heavily geared, really feel the pinch.

It is certainly not time to advocate abandoning the stockmarket, but with at least one more rate rise anticipated, it would not be a bad idea to consider the relative investment merits of the FTSE100's top ten stocks.