Rates 'finely poised', says MPC member

A member of the Bank of England's Monetary Policy Committee yesterday warned debt-laden British consumers that interest rates would not stay low forever and that they should budget for that.

In a speech in Leeds that followed news of another surge in mortgage borrowing, Paul Tucker said British monetary policy was now "finely poised" as there were downside risks from the global economy but upside risks to consumer demand.

But he said prudent households should be wary of overstretching themselves and plan for the likelihood of higher borrowing costs ahead.

Mr Tucker said: "Given the debate about household debt, it is worth bearing in mind that the current level of short-term interest rates is most likely below their long-term average. Personal finances would prudently be managed on the basis that rates are likely to be somewhat higher on average in the medium term."

But he also said that interest rates were unlikely to soar as they had done in the late 1980s, precipitating a collapse in the housing market, as policymakers struggled to tame rampant inflation.

Mr Tucker said some rise in debt levels was only to be expected given the economic stability of recent years but that it was difficult to say how much was too much.

The BoE held interest rates steady at their 48-year low of 3.5 per cent earlier this month in a unanimous decision and it was revealed that Mr Tucker was one of the MPC members who explored arguments for a rise as well as cut at that meeting.

Figures from the British Bankers' Association yesterday showed that the value of mortgage approvals for house purchase in July exceeded £10bn for the first time ever.

Mr Tucker said that he now saw only a slim chance of a sharp drop in house prices. "There seems to be less immediate risk of severe weakness in house prices," he said.

Meanwhile, British consumer confidence fell in August for the first time since the war in Iraq. The research company Martin Hamblin GfK said its consumer confidence barometer fell to minus 3 in August from minus 1 in July, its first month of deterioration since March.

Jonathan Loynes, the chief UK economist at Capital Economics, said: "Having rebounded strongly from the war-depressed levels of the spring, it looks like confidence has now stalled again, presumably in response to weaker employment growth, tax increases and concerns over the level of debt."

He added that the fall in consumer confidence supported suspicions that the recent strength of high street spending was weather-related and not an indication of growing consumer optimism.

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