James Emmett of HSBC casts his eye over the current economic climate.

These must be confusing times for the Monetary Policy Committee. Most of the recent economic news has been positive. Consumers are still spending, unemployment keeps falling, and economic growth is accelerating and is now above trend.

Although most observers still believe the Chancellor's growth prediction of about 3.25 per cent for 2004 is optimistic, the gap between his view and the consensus of independent forecasters is closing.

Because the Bank of England's view of short-term prospects is as upbeat as that of the Treasury, an increase in base rates is generally expected. As activity strengthens, any spare capacity will be absorbed and inflationary pressures will re-emerge.

Since the MPC believes there is little spare capacity available, it will take only a modest pick-up for prices to start rising.

Higher interest rates are the obvious response. The question is when, not if. The MPC decided in April: 'not just yet'.

The MPC has also been worried about the surge in borrowing. The numbers are mind-boggling. Total consumer debt at the end of last year totalled £936 billion, split between unsecured debt (credit cards, loans, overdrafts, etc) of £170 billion and secured debt (mostly mortgages) of £766 billion.

Just three years earlier, the equivalent figures were £127 billion for unsecured debt and £535 billion for secured debt, making a total of £662 billion. This represents an increase of 41 per cent during a period in which household incomes rose by just 14 per cent.

Consequently, outstanding debt as a share of households' disposable income jumped from 101 per cent to a record 125 per cent.

Although historically low interest rates mean the debt is no more onerous to service now than it has been over the past 15 years, there are fears that as borrowing continues to escalate and base rates move upwards, consumers are becoming more vulnerable.

On the plus side is the steady rise in house prices that has added to notional wealth.

Positive equity is now estimated by the Council of Mortgage Lenders to be about £80,000 per owner-occupying household. Although homeowners have larger debts than those who are renting, they also have the comfort of an appreciating asset to support their borrowing. All of this could come tumbling down, of course, if unemployment was to take off or if interest rates surged.

Since the distribution of debt is now broader and deeper, base rates of 7.5 per cent could do the sort of damage today that rates of 15 per cent did in 1990. But, given the inflation outlook, base rate rises are likely to be modest (just 5 per cent by the year end), while a re-run of the unemployment and housing market nightmares of the early 1990s is not on many people's radar.