Bank of England warns of debt danger

The Governor of the Bank of England has warned indebted consumers against stretching their finances too thinly. His comments fuelled speculation that interest rates will soon rise again.

Mervyn King said recently "the monetary policy committee may have to take further action to bring inflation down."

He said banks have become increasingly willing to provide finance and credit is readily available. "In light of the greater availability of credit, any person or family that borrows at a variable rate should recognize that the interest rate they will pay in future may vary."

He added: "It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels." King also said that the quantities of broad money and bank lending are now around 14 per cent higher than a year ago – rates of growth last seen in 1990 when inflation was more than eight per cent.

In the past, the Bank of England has been adamant that the growing level of personal debt does not pose a threat to the economy. King’s comments have been seen by some as an indication that this view has changed.

The last time King made a similar warning was related to house price rises in 2004 and had the effect of slowing the market down.