Bank chief warns on interest rates

Britain faces a decade of rising interest rates and a tougher economic environment, the new governor of the Bank of England, Mervyn King, has warned.

The alert comes in Mr King's first speech since taking over in July and will strike fear into the thousands of homeowners who have taken on large mortgages or remortgages as well as holders of high spending/low repayment credit cards.

After a decade of low interest rates culminating in today's basic rate of 3.5 per cent, the lowest for 48 years, Mr King gave the clearest hint yet that the next move could be upwards.

City investors are betting that UK base rates could rise to fourper cent by the end of this year and 4.25 per cent next spring.

Mr King forecast that a recovery in the world economy would leave Britain's commerce and industry less scope for growth and more susceptible to economic shocks.

"When shocks, as they will, hit our economy, it is almost inevitable that there will be somewhat greater volatility of both output and inflation than the remarkable stability we have become used to in recent years," he told businessmen attending an East Midlands Development Agency dinner in Leicester last night.

One of the shocks could be for homeowners with large mortgages. If interest rates do rise, thousands will find it increasingly difficult to meet monthly repayments negotiated during the past few years of low rates.

Thousands could face repossession of their homes as they did during the early Nineties. Other borrowers could suffer as unsecured lending is rising to record levels.

Mr King warned: "So far we have been keeping rates low to ensure there was sufficient growth in domestic demand to offset the weaker external sector, and if the world economy recovers, then of course we will not need to do that."

He added that Britain had enjoyed a decade of expansion thanks to a mixture of inflation targeting, improvement in public finances, economic reforms and good luck.