Governor warns on mortgage rates

HOME loans could rise later this year, householders were warned by the Governor of the Bank of England on Tuesday night. Sir Edward George said the Bank may be forced to increase interest rates if consumer spending does not start to slow down.

His comments came two weeks after the City was taken by surprise when inflation shot up from 1.9% to 2.6%, fuelled by higher petrol and gas prices. Interest rates, meanwhile, are at a 38-year low of just 4% after a series of cuts by the Bank's monetary policy committee.

Appearing before the House of Lords economic affairs committee, Sir Edward said the Bank was hopeful that domestic demand would start to ease during 2002.

However, he added: 'I could easily construct a scenario in which it makes perfect sense...to actually see interest rates rising. If the world economy picked up more strongly than we've assumed and if consumer spending continued to go on at this rate, it would be perfectly sensible.'

Sir Edward added that rates may not have to rise as sharply as some commentators have suggested. He said the Bank was less optimistic about the recovery of the world economy than many in the City, who feared a strong recovery would result in big interest rate rises.

Pressed on the impact of the 11 September atrocities on the global economy, Sir Edward said he believed the worst effects on the financial markets had worn off. He also referred to the 'surprising strength' of the housing market. Despite evidence that price rises were finally slowing down towards the end of last year, recent figures suggest they were picking up again.

Turning to the continued weakness of the euro, he admitted he was mystified by its low value but said he expected the single currency to recover at some stage. The governor told the committee that there was a risk of a fall in sterling's value, which he said could push inflation even higher. Sir Edward also made it clear that he believed the Government's inflation target of 2.5% should not be changed.