Raising interest rates ‘a very blunt instrument’, says deputy governor

House prices are rising at their fastest rate in nine years – led by a 26 per cent increase in London – prompting some speculation that the central bank may need to raise rates to keep them in check.

But Sir Jon said rate rises were a last resort – a view also expressed by chief economist Andy Haldane on Wednesday – and that the central bank would prefer to use more targeted lending curbs first.

“Using interest rates to deal with financial stability risks can carry a high cost. It is a very blunt instrument that affects the economy as a whole. So although it is an effective line of defence, it should be seen as one of the last lines of defence,” he told a business event in Liverpool.

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

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

Sir Jon said the central bank was more willing to use interest rates to control asset prices than before the financial crisis, after seeing the damage that bubbles could do.

“Knowing what we now know, we would be more prepared,” he said.