Bank warning on negative equity

We may be borrowing too much, Bank chief Mervyn King warns

Some homeowners could be facing negative equity if UK interest rates continue to rise, Bank of England Governor Mervyn King has warned.

But he played down fears that the problem would be as bad as that faced by homeowners 10 years ago.

"There is a risk that heavily-indebted households will be badly affected by changes in economic circumstances or interest rates," Mr King said.

People must "think carefully" about how much debt they can afford, he added.

Last week the Bank raised UK interest rates for the first time in nearly four years, to 3.75%.

Growth

The Bank's latest quarterly inflation report warned that if the housing market continued to race along there could be trouble ahead.

"The longer house price inflation continues to exceed growth in average household incomes... the greater the risk of a sharp adjustment in house prices and thus to spending further ahead," it said.

The broad picture is one of steady growth and consumer spending Bank of England

Mr King urged savers to shop around for the best rates, and put their money into institutions which have moved rates in line with the Bank's recent interest rate rise.

But he said that people had so far managed to cope with their debts fairly well.

"There is no indication that the scale of the debt problems have actually risen markedly in the last five years," Mr King said.

"We can draw real comfort from that."

The Bank's report said underlying inflation (RPIX) was expected to edge down from its current rate of 2.8% in the near-term and stay "close" to its 2.5% target for the remainder of the two-year forecast period.

Economic growth would remain "marginally above trend" over the coming 24 months, the Bank added, with GDP expected to rise at an annual rate of 3% from the second half of next year.

"The broad picture is one of steady growth and consumer spending, combined with strong growth in public expenditure and a modest expansion in business investment," it said.