Bank warns on UK debt mountain

THE Bank of England warned Brits to curb their appetite for debt. Governor Mervyn King declared that 'everyone needed to think carefully' about how much they could afford to borrow.

He offered an assessment of the economy which suggested real fears over debt levels and the property boom.

'There is a risk that heavily indebted households will be badly affected by changes in economic circumstances or interest rates,' said King. 'Everyone needs to think carefully about the amount of debt they can afford.'

He said general debt levels were currently 'not a cause for concern' as repayments were still affordable because of low interest rates.

However, he admitted there were gaps in knowledge about levels of debt among particular groups who might be more vulnerable to increases in interest rates than others.

King's comments were timed to coincide with the run-up to Christmas, which poses the greatest debt risk to families. Spending on credit cards and bank borrowing normally soars in the festive season.

Commenting on the property market, King said continuing sharp increases in prices were 'a worry' for the health of the overall economy.

He added: 'The longer house price inflation continues to exceed growth in average household incomes, the greater the additional upward pressure on spending and inflation in the nearterm, and the greater the risk of a sharp adjustment in house prices and thus to spending further ahead.'

King accepted there was a negative equity risk, but insisted that it would not be as serious as the crisis in the 1990s property market collapse.

The Bank last week raised the base interest rate by 0.25 [ercentage points to 3.75% in a bid to stifle house price rises and spending.

The decision was heavily influenced by the fact that annual property price rises are running at 16.7%. However, some analysts have predicted prices could fall by as much as 20% from next year.

King's comments came as the Bank published its quarterly inflation report, which expects the economy to grow 'a little faster than trend'.

It added: 'The broad picture is one of steady growth in consumer spending, confined with strong growth in public expenditure and a modest expansion in business investment.'

Last night Liberal Democrat Treasury spokesman Vince Cable said 'alarm bells should be ringing'. He added: 'With property price inflation five times higher than general inflation, even the Bank now admits the market is overpriced and unsustainable long term.'

Latest figures show Britain's consumer debt mountain at almost £1 trillion, equivalent to the total value of the economy and 120% of households' disposable income.