Unbalanced growth is better than no growth at all, says Sir Edward

The Governor of the Bank of England last night played down fears that a fall in the pound or further surges in house prices would trigger hikes in interest rates.

In comments that will be seen as another attempt to calm market jitters over monetary policy, Sir Edward George said he welcomed the current strength of consumer spending.

However, he acknowledged an abrupt slump in the pound or collapse in spending would cause great concern at the Bank.

Sir Edward told peers on the Lords economic affairs committee that the Monetary Policy Committee had encouraged consumer spending because it was the only part of the economy it could directly impact.

"We are concerned about the external and internal imbalances but we have taken the view that unbalanced growth is better than no growth at all," he said. "We welcome the strength of house prices and we welcome the strength of consumer spending. We are not uncomfortable with what is going on."

The latest figures from Halifax, the largest mortgage lender, showed prices rising at the fastest annual rate for 13 years, prompting fears of an unsustainable boom.

The Governor told peers he was aware a sharp rate rise could leave households with debt they could not afford to service. But he said: "Frankly at this stage we would have to have the kind of rises in interest rates which it is difficult to see."

He said rates – currently at 4 per cent – would have to double before people would find it difficult to pay off their loan costs. "I don't think we are looking at that kind of picture."

He was repeatedly questioned on the pound's exchange rate, which he said had been higher than expected against the euro for five years. He said the issue for the MPC was whether rates should rise to offset the impact of its eventual fall.

Asked whether a depreciation would be good news, he said: "Were the pound to fall significantly we would see inflation rise a bit but we would see the imbalances lessen and we would see that helpful to domestic demand and there would be a sectoral impact."

Asked by Baroness Hogg, a former Independent journalist, whether he was more inclined to think it would be a good thing rather than "all bad", he replied: "Yes, as a matter of fact, I do."

But he added he was worried imbalances between domestic and export demand and between services and manufacturing might become so "extreme" that there would be an "abrupt adjustment".

His comments came as new figures showed business investment slumped at the end of last year, fuelling speculation of a cut in the latest estimates for overall UK growth.

Total investment by British companies between October and December fell 3.2 per cent from the previous quarter, National Statistics said. Investment is now 7.6 per cent down on a year earlier, the worst performance since the last recession in 1991.

Manufacturing investment enjoyed a surprise rise of 1.6 per cent but analysts said it was a small recovery from the dramatic plunge of more than 11 per cent in the previous quarter.

The drop may feed into the second estimate of fourth-quarter GDP growth published later today. "The risk is that there may be a slight downward revision on the initial estimate of 0.2 per cent," said Simon Rubinsohn, chief economist at City brokerage Gerrard. He said the fall was another sign of the pressure manufacturing was under from weak demand and a strong pound.

Meanwhile, pay deals fell "sharply" in January, with average settlements down to 2.5 per cent, according to a report yesterday.

Increases in the three months to January fell 0.3 per cent compared with December and reached the lowest level since March 2000, Industrial Relations Services said.