Deputy governor hints at half-point interest rate rises

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The Independent Online

The Bank of England will not hesitate to raise interest rates if inflation threatens to run out of control, one of its deputy governors said yesterday.

Rachel Lomax said the Bank was worried about consumers' "binge behaviour", saying "soaring" house prices had fuelled demand across the domestic economy. She also hinted the Bank was prepared to abandon its strategy of "gradual" rate rises - a veiled hint it could order half-point rate rises. "If we delay taking action until inflation has taken off, it will be more difficult to bring it down again without causing the economy to slow sharply," she said.

Her comments, which will fuel fears of a rate rise next week, came as figures showed a rise in investment and in the number of manufacturers raising prices. Ms Lomax told the British Hospitality Association the UK had emerged from the global slowdown of 2001 with "less slack" than other economies.

She said the economy had grown at or above trend for the past year and the Bank had raised rates to ensure that "the party remains under control".

"We don't want to encourage binge behaviour any more than you do - it makes life unpleasant for other people and leaves a nasty mess behind," she said. "That points to taking action at the first sign of trouble and preferably before. In current circumstances strengthening demand is beginning to put upward pressure on costs."

She echoed comments by Mervyn King, the Bank's Governor, saying it was not the Bank's "job" to control house prices, adding: "We cannot, and do not, ignore the influence of soaring house prices on consumer spending and hence on the overall pressure of demand."

She said the Bank had decided to move rates gradually because of uncertainty about how people react. "We have avoided springing surprises ... but we wouldn't be doing our job if we didn't constantly revise our views in the light of new information and new research."

However, she tempered her warnings, saying the link between house prices and consumer spending was less than during the last property boom in the late 1980s. Ms Lomax also left open the possibility that the Bank might have to cut rates if house prices were to fall.

"There are few signs of obvious financial stress at current interest rates [but] given the strength of the current jobs market and the current housing market, this could change if several of these factors weakened at the same time."