Bank ace warns against interest rates 'shock therapy'

A senior Bank of England representative today cautioned against using “shock therapy” to jolt British householders out of their excessive spending habits.

Paul Tucker, who is among nine members of the Bank’s monetary policy committee (MPC), said the rapid spurt in house prices and debt in recent months had forged a case for ditching the gradual approach to interest rates.

Members of the MPC could increase the cost of borrowing to prick the bubble in the housing market to prevent a heavier crash later, he said.

But he added: “I would not, however, subscribe to making a surprise policy tightening as a form of shock therapy.”

Mr Tucker told the National Association of Pensions Funds’ annual investment conference in Edinburgh that rates of 4% were still stimulating the economy.

This was despite worries among unions and business leaders that a higher cost of borrowing would stifle the fledgling recovery in the manufacturing sector.

Rates would have to rise if inflationary pressures continued to mount and output grew faster than expected, he cautioned.

Economists believe the MPC will wait until May before raising rates but data released this week could yet tempt members to increase the cost of borrowing next month.

Figures from the British Office of National Statistics on Thursday showed sales for the three months to February to be 1.9% higher than in the previous three months - the highest quarterly rise since June 2002.

Figures from the Council of Mortgage Lenders, also published on Thursday, showed that borrowing by home owners slowed in February, dropping to its lowest level for nearly a year.