MPC member: 'Avoid shocks'

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The Independent Online

The Bank of England should not inflict a "shock therapy" of unexpected rises in interest rates for fear of triggering a property crash, one of its senior executives said yesterday.

The Bank of England should not inflict a "shock therapy" of unexpected rises in interest rates for fear of triggering a property crash, one of its senior executives said yesterday.

Paul Tucker, a member of the monetary policy committee (MPC), gave the most explicit hint to date that the Bank plans to order further rate rises but insisted any moves would be "gradual".

In a speech to pension fund managers, Mr Tucker said the rate rises in November and February had withdrawn "some but not all" of the stimulus to the economy.

"If output continues to grow above trend, I for one would expect us to continue gradually to reduce the degree of stimulus to demand broadly in line with the take up of slack in the economy and any consequent pick up in inflationary pressures," he said.

But he said the MPC was aware the marked rise in consumer debt meant any rate rise would have a disproportionate effect on consumers' disposable income. "The implication is that policy would tend to move towards neutral more slowly than would otherwise be optimal, or cautiously for want of a better word," he said.

He specifically rebutted the argument put forward by Sir Andrew Large, a deputy governor of the Bank, that rates should be raised more than would otherwise be the case in order to "arrest" the continued strength of consumer spending and borrowing.

Mr Tucker told the National Association of Pension Funds conference: "I would not subscribe to making a policy tightening as a form of shock therapy.

"One of the emphases of the MPC's approach has been to do our utmost to help households, businesses and financial markets to understand our strategy and, in particular, how we react to developments in the economy."

He said he voted to keep rates on hold a fortnight ago because a rise would have been "misunderstood" as a sign the committee had changed its strategy. "With inflation well anchored, that was not a risk worth taking so I voted for no change," he said.

On the global economy, Mr Tucker said he remained concerned about the recovery in the United States, saying the failure of the economy to create jobs could dent confidence and slow spending. "My take is that the most likely outlook is positive, but that downside risks have again become tangible," he said.

On the euro area, he said signs of recovery had recently been more apparent in the surveys than in the data. "I continue to place greater weight on the encouraging surveys."

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