Rate rise a ‘last resort’ to deal with housing bubble risk

“As house prices go up faster than the amount people earn, the only way people can buy is to take on mortgages at higher and higher rates compared to what they earn and then debt goes up and that leaves the economy quite vulnerable to shocks,” he told the BBC.

“What we must try and do is to stop that pressure on house prices leading to higher mortgages relative to what people are earning.”

He said raising rates would be an effective but “very blunt” way of tackling risks to financial stability from booming asset prices.

UK house prices are rising at their fastest rate in nine years – led by a 26 per cent increase in London – prompting speculation the Bank may need to raise rates to keep them in check.

But Cunliffe said rises were a last resort – echoing earlier comments by Governor Mark Carney – and that the Bank would prefer to use more targeted lending curbs first.

“Using interest rates to deal with financial stability risks can carry a high cost. So although it is an effective line of defence, it should be seen as one of the last lines of defence,” he said.

The Bank has previously said its decision to raise record-low borrowing costs will be driven by how much slack is in the economy – and in particular the jobs market – rather than the level of house prices.

Most economists expect the Bank to raise rates later this year or early in 2015, as the economy is forecast to grow quickly and wages start to pick up.

l The European Central Bank yesterday left interest rates steady a month after cutting them to record lows. From next year, it said, it will publish minutes of its policy meetings and hold them every six weeks rather than every month.