Spending spree could force up rates

INTEREST rates could rise next month in response to alarm at the increasing number of Britons who are spending their way into debt. The Bank of England may raise rates after it released figures showing households are more than £744bn in debt following a record spending spree in February.

Bank chief Sir Eddie George has already warned that interest rates may have to go up to head off a rise in inflation. But since then, borrowing - fuelled by low interest rates - has soared. The Bank's Monetary Policy Committee, which sets rates, is expected to keep them unchanged when it meets on Thursday. But it could raise them in May on the back of the latest figures.

In the past George has been keen to see whether consumer spending might slow without any help before raising rates. However, any rise in interest would be met with horror by manufacturing, which remains in recession. Bosses want further interest rate cuts to boost the ailing sector.

Debts including home loans rose by £7bn in February as consumers spent a record amount on credit cards and shrugged off fears of a recession.

The record amounts - not seen since the economic boom of the late 1980s - have alarmed some financial experts, who fear consumers are overextending themselves with large mortgages, personal loans and credit card debts. They fear millions could suffer financial ruin if the economy goes into recession or interest rates start to rise.

Some economists say the debt is affordable because interest rates are at their lowest levels in 40 years. But they believe mounting job losses - though low at present - could hit UK industry as part of a global economic slump. The Financial Services Authority has already warned consumers against 'reckless spending'.

Mortgage lending remained strong during February, increasing by £5.16bn as the housing market continued-to boom. House prices in March jumped by 1.%. This week Hometrack, which monitors information from 4,000 estate agents around the country, said that prices would rise by 12% in 2002.

Homebuyers also have more unsecured debt than in the last housing boom. During February, consumers spent £ 9.21bn on credit cards alone, the Bank said. But strong repayment led to net lending on credit cards rising by only £588m. Other borrowing, including personal loans, rose by £1.26bn as families tried to consolidate their debts. Consumer credit jumped by £1.85bn.

John Butler, economist at HSBC, said: 'It shows consumers remain confident and have little intention to cut back on their current level of debt.'