Bank of England 'fuelled personal debt to avert recession'

Bank of England chiefs deliberately fuelled a consumer boom they knew would massively boost house prices and personal debt to avert a recession, a former governor said today.

Lord George said they "did not have much of a choice" as they battled to use interest rates to prevent the UK being dragged into a worldwide economic slump.

And he said his legacy to the Monetary Policy Committee (MPC) - which decides the rate - was to "sort out" the problems that policy had caused.

Lord George - who headed the Bank for a decade from 1993 - revealed that he knew the approach was not sustainable as he gave evidence to a committee of MPs.

"In the environment of global economic weakness at the beginning of this decade ... external demand was declining and related to that business investment was declining.

"We only had two alternative ways of sustaining demand and keeping the economy moving forward: One was public spending and the other was consumption.

"Now of course it's true that taxation and public spending may influence the economic climate, may influence consumer spending.

"But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term.

"But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States.

"That pushed up house prices, it increased household debt ... my legacy to the MPC if you like has been 'sort that out'."

He told the Treasury Select Committee - investigating the record of the first decade of the MPC: "We had to take action that on the whole we would prefer not to: stimulating consumer demand because all the other elements of demand had fallen away.

"And we were very conscious of the fact that that could give rise to problems in the future.

"We tried very hard not to do more than we needed to to keep within the inflation target limits but we knew that that was going to cause problems later on which are still with us."

Lord George spoke as he rejected suggestions the MPC should act to target specific concerns such as high house prices.

It was vital to take the wider picture of the economy, he said, warning that trying to juggle specific factors would be impossible.

Concerns have been raised that the present official rate of inflation does not reflect the everyday experience of many voters.

The former governor also dismissed calls for the MPC to be given powers wider than setting interest rates - insisting it must not be drawn beyond purely technical decisions.

He also advised caution over predictions of a collapse in the housing market - pointing out that experts were saying one was about to happen when he left office.

"We are still waiting for it," he said.

Copyright Press Association 2007.

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