Warning over cost of borrowing

A former member of the rate-setting Monetary Policy Committee (MPC) have warned that increases in the cost of borrowing are essential to cool the recovering economy.

Andrew Sentance, who served on the Bank of England committee, raised the concern at a Treasury Select Select committee.

Mr Sentance, who repeatedly voted for rate rises in his final year on the MPC in 2010 and 2011, said the Bank Rate, which has been fixed at 0.5pc since March 2009, should already have been increased to 2pc.

Millions of mortgage borrowers have benefited from lower rates, which have slashed the cost of monthly repayments. The Bank's Funding for Lending Scheme has pushed rates for new borrowers down even further since last summer.

Kate Barker, another former MPC member, also warned MPs of problems ahead. She said mortgage borrowers on variable rate loans were “the most exposed” to the risk of rate rises and should prepare for them.

Mr Sentance said the time had come to prepare for higher interest rates and that 2pc was a more realistic “neutral” level at the moment than the 0.5pc crisis rate.

“There are potentially serious consequences of ultra loose policy,” he said, citing the recent “unsustainable” rise in stock markets as one example.

“There is not going to be an ideal time to move away from low interest rates. Growth is going to be slow for some time. I would like to see central banks beginning to prepare the way for a gradual rise in interest rates – to try to get the economy functioning a bit better.”

Ms Barker added: “We were unduly simplistic in our approach to monetary policy in the run-up to the crisis, as we didn’t pay enough attention to imbalances in the economy."

There were initial signs when rates were first cut that some borrowers were taking the opportunity to increase their mortgage repayments but this trend petered out.

A report by the Bank of England on housing equity withdrawal in the third quarter of 2012 said: "The decline in housing equity withdrawal – and move to injections of housing equity – since the start of the financial crisis has not been associated with an increase in repayments of secured debt."

Source: Telegraph