No 'shock' rates jump in store

A MEMBER of the Bank of England's monetary policy committee today ruled out 'shock therapy' to tackle spiralling house prices and mounting consumer debt.

Paul Tucker, the Bank's executive director for financial markets, reinforced the City's expectations of higher interest rates but signalled the MPC would maintain its 'softly, softly' approach.

Speaking at the National Association of Pension Funds' annual investment conference in Edinburgh, Tucker said rates at their current level of 4% were stimulating the economy.

'If, as projected, output continues to grow above trend then - depending of course on any other developments affecting the outlook- - 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 inflation pressures looking ahead.'

The MPC has twice lifted the cost of borrowing since November. Most economists expect another move in April or May.

Tucker said the MPC favoured a cautious approach because of uncertainties about the impact of rate rises on debt-laden consumers.

'With higher debts relative to incomes, interest rate changes will tend to have a bigger effect on the income that households have free to spend after servicing their debts,' he said.

'The implication is that, other things being equal, policy would tend to move towards neutral more slowly than would otherwise be optimal, or 'cautiously' for want of a better word.'

While he acknowledged the argument that rates should be cranked up unexpectedly to head off a damaging consumer crash, he dismissed it.

'I would not subscribe to making a surprise policy tightening as a form of shock therapy,î he said, adding that he did not vote for higher rates this month because that would have surprised the market.

After a lull last year, the housing-market has taken off again, and cheap loans mean consumers are piling on more debt than ever before. Experts warn the longer the boom continues, the greater the risk of an early-1990s-style crash.

Economists said Tucker appeared to be preparing the ground for a rate rise. 'He is trying to gear the market up to the possibility of rates moving next month,' said George Buckley at Deutsche Bank.

'The last thing he wants is to spring a surprise if strong data forces the MPC's hand.'

Tucker said the outlook for domestic demand may be slightly stronger than it looked a couple of months ago, adding there was some evidence of inflationary pressure.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in