A member of the Bank of England's rate-setting committee said that mortgages which leave buyers with an immediate risk of negative equity should not be banned and that bank demands for big deposits from homeowners may have been "overdone."

Kate Barker, who was commissioned by the Government to write a report on the housing market several years ago, said “I’m not personally convinced I want to say we’d absolutely never have 100 per cent mortgages.

"You might want to have rules about the averages across the book — all that kind of thing. Rather than saying 'no never' because personal circumstances vary enormously," she told The Spectator.

Her comments fly in the face of the Government's pledge to crack down on riskier home loan deals which offer buyers 100 per cent or more of the value of their property. Gordon Brown recently suggested that 100 per cent mortgages should be banned.

Some 900,000 homeowners have been plunged into negative equity — owing more on their mortgage than their home is worth — after near 20 per cent falls in property prices, figures released yesterday by the Council of Mortgage Lenders showed.

A further 1.1 million homeowners have seen the equity in their property whittled down to less than 10 per cent.

Three in four of those in negative equity have an average shortfall of between £6,000 and £8,000, but nearly a quarter of a million borrowers have a shortfall close to £20,000. A further 13,000 homeowners are in negative equity by £37,000, it said.

Ms Barker also suggested that the banks had over-reacted to the credit crunch by withdrawing many mortgages for borrowers with small deposits.

Banks and building societies now only offer the most competitive mortgage deals to those with at least a 20 per cent down payment, while the very cheapest deals are reserved for those with a 40 per cent deposit. "The big slide down to 75-80 per cent [loan to value requirement] may be overdone," she said.

Speaking about the Bank's Monetary Policy Committee's (MPC) remit, Ms Barker also indicated that targeting inflation alone was not sufficient to ensure economic stability. The MPC is tasked with keeping inflation close to a target rate of 2 per cent. But last year it soared to 5.2 per cent, and is now expected to plummet close to zero.

“Do I think we should have perhaps looked a bit more at some of the money indicators?’ Yes, possibly that’s true.”

Yesterday, David Miles, the chief UK economist at Morgan Stanley who is set to join the MPC in summer, said there were signs that the worst of the country's recession may be over and that were now reasons to be guardedly optimistic about the economy.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive