Next rate move may be up, warns Bank

The Bank of England yesterday issued a stern warning to Britain's heavily indebted consumers to brace themselves for borrowing costs to rise from their 48-year lows over the coming months.

As robust mortgage lending figures underlined consumers' appetite for debt, Paul Tucker, a member of the Bank's interest rate-setting monetary policy committee, said he was concerned that households were betting on borrowing costs remaining low for ever.

"Personal finances would prudently be managed on the basis that rates are likely to be somewhat higher on average in the medium term," he told an audience at the Leeds Financial Services Initiative, echoing warnings in the minutes of the MPC's meeting this month.

Bank policymakers have become increasingly concerned that high levels of consumer debt are making the economy more vulnerable to shocks. MPC members had expected consumer spending growth to slow this year as higher national insurance contributions and rising inflation ate into incomes.

The latest gross domestic product figures show spending rising by 1.3% in the second quarter of the year, the fastest pace since autumn 2001.

Mr Tucker warned that the rapid pace of borrowing could keep consumer demand above the levels projected by the MPC in the coming months. "In particular, there is the possibility that households will borrow more against their homes in order to shield themselves against decelerating disposable incomes," he said.

The fact that the number of loans approved for mortgage equity withdrawal in July was 35% higher than a year ago supported the picture of homeowners borrowing to prop up their spending. The British Bankers Association said the total number of mortgages approved in July was 10% higher than in June, and 19% up on a year ago, at 281,500. Total mortgage lending in July, at £16.9bn, was 16% higher than the same month in 2002.

An early hint that householders could be worrying about their financial position came yesterday in research carried out by Martin Hamblin GfK for the European commission. It showed consumer optimism dipped this month for the first time since March. The research firm said its monthly confidence barometer fell by two points in August, from minus 1 to minus 3, as households felt less upbeat about the state of their finances.

Mr Tucker said uncertainty about consumers' behaviour, and the pace of recovery in the global economy, meant the MPC's decisions would be "finely poised" over coming months. Consumers should be aware that rates had been cut below their long-term average "in order to support the economy".

The MPC voted unanimously to leave rates on hold at 3.5% this month. Mr Tucker, a Bank-appointed committee member, said he "was one of those who explored arguments for a rise, as well as those for a further cut, before concluding that 'no change' was the best place to be given the outlook for inflation".

Mr Tucker said the global economy was "delicately poised". He expressed concern that the US corporate sector could be waiting for tangible evidence of an improvement in demand before carrying out investment plans postponed during the downturn.