Bank of England deputy governor hints at rate rise to curb spending

Burgeoning household debt poses a "credible" threat to the economy, which could require further rate rises from the Bank of England, a senior Threadneedle Street policymaker warned yesterday.

Sir Andrew Large, the Bank's deputy governor who has voted five times since last October for higher rates, said record levels of household debt had made people increasingly vulnerable to economic shocks.

While a slump in house prices, which could tip overstretched consumers into bankruptcy, was not the most likely scenario, Sir Andrew hinted that further rate rises might be needed to persuade consumers to slow down their spending. "Each month when we on the MPC [monetary policy committee] make our policy decision I am conscious of the debt situation," he said in a speech to corporate treasurers gathered in Wales. "In particular the possibility that the potential vulnerabilities stemming from higher debt levels do in fact crystallise at some point and trigger a sharp demand slowdown that could have an adverse impact on monetary stability."

Sir Andrew voted for no change at the March meeting but City analysts said the hawkish tone of the discussion suggested the MPC has come round to his views about the dangers of rising household debt. If consumer debt continues to rise faster than income, households will be forced to rebuild their balance sheets at some point, he said, triggering a spending slowdown which could send inflation below the government's 2% target.

City analysts said Sir Andrew's support for precautionary rate rises was further evidence that the Bank might increase borrowing rates in April rather than May.

Data last week showed that retail sales were growing strongly and employment had fallen further. Sir Andrew's remarks follow a similarly blunt hint last week from Paul Tucker, the Bank's head of financial markets, that rates are about to rise again.

Treasury officials played down the risks of a sharp correction in house prices. John Cunliffe, the Treasury's head of macroeconomic policy, told backbench MPs that double digit house price inflation will slow following the Bank's two increases in interest rates since last November.

"I wouldn't put a percentage on the chance of a hard landing in house prices," he told the Treasury select committee. "There must be risk on the downside of house prices correcting sharply, but I think it is a small risk."