Interest rate hike 'could trigger crisis'

Central bankers were warned yesterday not to order massive hikes in interest rates for fear of triggering a crisis for debt-laden households and businesses.

The Bank of International Settlements, which acts as a bank for central bankers, became the latest body to say the current boom in house prices was "unsustainable".

It also said a sudden slump in the dollar could derail the US recovery – a warning that coincided with the currency's sharpest fall in a fortnight yesterday.

In its annual report, BIS said: "The build-up of corporate and household debt, particularly in the households of English-speaking countries, could continue to exert a moderating influence in the global turn."

The bank praised industrialised economies for taking advantage of low inflation to cut interest rates but warned that this had encouraged "uncommonly high" levels of spending.

BIS warned that rising interest rates would make the current high levels of debt unaffordable. "In contemplating when and how quickly to raise rates, assuming the current recovery continues, the possible fragility of balance sheets may need to be taken into account," it said.

The bank said the ratio of house prices to disposable incomes was nearing record highs in several countries. "Equally significant is the fact that house prices ... seem to be playing a crucial and potentially unsustainable role in supporting consumption," the report said.

BIS highlighted the US economy as the other major risk. "An issue is whether the US can continue to be the main source of global growth, given the size of its current account deficit and external liabilities," it said.

Meanwhile, the Organisation for Economic Co-operation and Development forecast that the dollar would extend its recent declines against the euro and the yen as investors moved out of US assets.

Yesterday the dollar fell more than 1.2 per cent to hit $0.9835, erasing recent gains and heading back towards its two-year low of $0.999 set at the end of June.