Brown Needs New Approach To Manage Lending

12.58.00pm BST (GMT +0100) Wed 5th May 2004

BWith a likely move to higher interest rates tomorrow, amid concerns over spiralling household debt and the house price boom, Liberal Democrat Shadow Chancellor Dr Vince Cable has today written to Chancellor Gordon Brown asking him to act more decisively over any potential threat to Britain's economic stability.

Dr Cable said: "The Bank of England is in danger of being compromised by heavy pressure from the Chancellor, who is using interest rates to deal with the consumer debt and the housing bubble. This is one club economics, and it's not working.

"To control the economy solely through the use of interest rates is creating imbalances.

"Driving up the exchange rate will further damage manufacturing.

"Measures are needed to curb the massive uncontrolled expansion of secured and unsecured debt.

"The Government needs to signal to the Bank of England that lending needs to be reined in.

"Gordon Brown must give further written guidance to the Bank of England clarifying their mandate and asking them to look at the scope for their monetary measures which could restrain the expansion of secured and unsecured lending.

"Measures such as higher capital reserve ratios must be considered."

Ends.

Notes

Letter from Vincent Cable LibDem Shadow Chancellor to the Chancellor of the Exchequer

Dear Gordon,

I read your comments last month urging the Bank of England to move towards higher interest rates in order to maintain stability in the economy.

This may well be a sensible step for the Bank of England to take on wider economic grounds but I am concerned that the Bank of England are being urged to take on a role which their mandate does not currently cover, the management of asset markets.

There is mounting concern over the potential instability being created by mounting consumer debt and the boom in house process which acts as security for much of this debt. You will recall I have been making this point for some time and there is now a wide concern expressed by economic commentators. It is clear that the Bank of England cannot use interest rates appropriately to deal with this problem without further unbalancing the economy. It is equally clear that the Barker reforms to the housing market, while sensible in themselves, do not deal with the short term 'bubble' in the market.

With regard to this I feel it is for you, as the Chancellor, to give written guidance to the Bank of England clarifying their mandate and asking them to look at the scope for monetary measures which could restrain the expansion of secured and unsecured credit. This might well involve intervening on the balance sheets of banks in such a way as to reduce the credit expansion albeit in a market friendly manner.

Yours sincerely

Vincent Cable