Charlie Bean’s prediction that it could settle at a lower level than the 5 per cent of the pre-crash period in 2008 came amid suggestions that the move away from the historic low 0.5 per cent base rate could begin sooner than expected.
Such a move would mean higher mortgage repayments.
Mr Bean told Radio 4’s The World This Weekend: “The bank rate averaged about 5 per cent in the decade or so before the crisis. It’s reasonable to think that, because of the headwinds that are still out there as well as some of the global forces … perhaps the level that we go to three or five years out might be a couple of percentage points below that.”
Mr Bean is a member of the Bank’s monetary policy committee, which sets UK interest rates.
His comments came as economist and former government adviser Will Hutton warned the average household mortgage payment could double over the next three years.
Recent concern over rising house prices and evidence that the economy is strengthening have intensified the debate over when rates might increase. The rate has been at 0.5 per cent since March 2009 and the Bank’s governor has indicated it will not start rising before next spring.
Mr Bean, who retires next month, said: “There’s a case for moving gradually because we won’t be quite certain about the impact of tightening the bank rate, given everything that has happened to the economy.
“It might not operate in quite the same way as before the crisis. So that’s an argument, if you like, for being a bit cautious, moving in baby steps to avoid making mistakes. If you want to pursue that strategy, you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve.”
When asked about the housing market, Mr Bean said authorities were more worried about rising household debt than property prices. He said: “Where the issues really start potentially being worrying is the accumulation of debt.
“So if there’s signs that banks are making loans to borrowers who may not be able to repay or we have doubts about… whether those households will be able to keep their consumption up if they borrow a lot, then they are reasons why the Bank’s financial policy committee might want to take some action to rein things back a bit.”
Mr Hutton said: “Typical mortgage payments could double over the next three years. If you look in the financial pages, you’ll see that you can fix your mortgage for 2 per cent for two years or 3 per cent for five years. In three years’ time, those rates will double.”
Faisal Choudhry, associate director of residential research in Scotland at estate agent Savills, said interest rates were dependent on a variety of factors. “This is looking at the long-term picture and is not going to happen tomorrow,” he said. “Decisions on the base interest rate are made by the monetary policy committee and take into consideration a range of factors such as wages and GDP. We don’t know what the state of the economy will be in one year’s time but we are expecting a gentle improvement over the next few years.”
He added: “In terms of mortgages, people are becoming more savvy, with many taking out fixed-rate mortgages. These sweeping, blunt statements about interest rates are irresponsible and scaremongering.”