MPC 'hawk' relaxed over build-up of household debt

Hopes of further cuts in UK interest rates were given a boost yesterday after one of the "hawks" on the monetary policy committee said he was relaxed about the build-up of household debt.

Hopes of further cuts in UK interest rates were given a boost yesterday after one of the "hawks" on the monetary policy committee said he was relaxed about the build-up of household debt.

Paul Tucker, who voted for this month's surprise rate cut by the Bank of England, said there was now less risk of a renewed boom in house prices.

He appears to have changed his mind since February when he voted against the rate cut because he feared it would trigger a further surge in mortgage borrowing that would increase the chance of a property crash. "I feel there's less risk of a very rapid further acceleration of house prices or debt," he told Wall Street Journal Europe.

He said there were "good reasons for thinking households can carry more debt", given the low levels of interest rates and inflation.

The Bank has slashed interest rates to 3.5 per cent from 6 per cent over the past two years in order to avert a recession by boosting demand from the consumer sector.

House prices rose almost 30 per cent last year while mortgage equity withdrawal - when homeowners borrow against the value of their home - is running at record levels.

Mr Tucker was downbeat on the outlook for the global economy, which he indicated was more important for UK monetary policy.

"I don't think anyone is going to be able to say with confidence that this period of weak investment has passed and that corporate America is going to start investing again," he said.

He said the path for the global economic recovery was "not going to be as smooth as I'd earlier thought", noting that forecasts for the eurozone had been cut.

Sterling's rise from mid-June to early July played only "a tiny little bit" of a role in his decision to vote for this month's rate cut, he said.

His comments were published as Germany's key Ifo business climate index rose for the third straight month in July to its highest level in a year, fanning cautious optimism that Europe's largest economy was on the verge of recovery.