Base Rate Rise 'Necessary' (veezq-21538)

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Speaking in Guildford, Sir John Gieve, deputy governor for the Bank of England, claimed that such a move would be needed by the monetary policy committee to help curb "spectacular growth" in borrowing for buyout and private equity deals which could cause the British economy to crash. As a result of any rise to the base rate, consumers could well find their monthly secured loan repayments increasing. Property would also be set to become more unaffordable for prospective first-time buyers.

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Sir John said: "House price inflation in London has outstripped the rest of the UK with prices in the smartest areas of Kensington and Chelsea climbing by 40 per cent since the start of 2005." Meanwhile, he reported commercial property prices in the City are twice as expensive as those in Paris and New York. He claimed that if such growth in house prices and borrowing continues, the country will be at greater risk of financial downturn.

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The deputy governor pointed to the current sub-prime lending crisis taking place in the United States as an example of what can happen if an economic cycle changes direction suddenly. The collapse in the dotcom boom was illustrated as a previous case in point. "As London strengthens its position in financial markets, the cycle in international finance will have direct effects not just through shifts in interest rates and asset prices but through jobs and pay," he added.

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Sir John also claimed that he had voted for interest rates to rise four times in MPC meetings this year due to increased uptake of consumer credit such as personal loans and a relaxation of lending criteria on the behalf of banks. Despite these claims he warned against increasing the base rate unnecessarily - a move which could further inhibit secured loan uptake. "We may increase interest rates too fast or push them up too far, with an unnecessary loss of growth," he pointed out.

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Last week, chief economist for New Star Asset Management, Simon Ward, claimed that the decision to maintain the base rate at 5.5 per cent for June was a missed opportunity by the MPC. He said: "The baby-step approach risks allowing an inflationary psychology to take hold, implying a higher eventual peak for interest rates." Mr Ward suggested that such a rise was "needed" to curb increasing house prices, which consequently impact upon homeowners' ability to pay off secured loan.

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Meanwhile, the Confederation of British Industry (CBI) claimed that interest rates are set to reach 5.75 per cent before settling back to 5.5 per cent towards the end of this year. Chief economic adviser Ian McCafferty reported that a "further interest rate rise now seems more likely than not this autumn" as consumer spending growth is set to ease to 2.1 per cent by 2008.

Rising food costs and "higher than expected import prices" were also reported to lead to increased inflation costs. However, he claimed that the CBI "does not see the need" for the base rats to go beyond the six per cent barrier.