Debt fears dismissed

The Bank of England's chief economist has dismissed speculation that UK households are sitting on a debt "time bomb" caused by a consumption binge.

13:21 29 July 2004

The Bank of England's chief economist has dismissed speculation that UK households are sitting on a debt "time bomb" caused by a consumption binge.

His speech yesterday to the Institute of Economic Affairs in London came on the eve of the Bank's announcement on consumer debt, revealed that UK consumers are now more than 1 trillion in debt.

But the Bank's interest rate setting Monetary Policy Committee (MPC) feels that higher interest rates would spell trouble for only a fraction of households, as more people have chosen to borrow money to invest in houses and other assets rather than fund a general spending spree.

"There could be a sharp correction to house prices, but equally house prices could just stagnate for a while until earnings catch up," said Charlie Bean, one of the nine members of the MPC.

"A soft landing is entirely possible if the economic conjuncture remains benign. That, for instance, was exactly how the adjustment occurred during the second half of the 1950s."

However, some pessimists point out that in the last two housing cycles, prices fell sharply after being significantly overvalued.

Mr Bean counters with the opinion that "the immediate economic outlook appears brighter than it has done for a while." But he admitted the property boom could see the MPC acting more rashly with interest rates if housing inflation got out of hand.

The Bank has already increased its base rate four times since November and is expected to do so again next week when the MPC hold their monthly meeting.