Davies softens stance over rates increase

The deputy governor of the Bank of England yesterday repeated its call for an increase in interest rates. But, in a speech just ahead of the publication of its quarterly Inflation Report today, Howard Davies struck a noticeably softer note than any recent comment from the Bank.

Mr Davies echoed recent statements that a rise in interest rates would be desirable. "We are not entirely persuaded that on current interest rates we are on track to meet the Government's inflation target of 2.5 per cent over the next two years, which is the remit we have been given," he said.

However, he added: "I should say the rise in rates we think necessary to meet the target is modest. We have been talking about a quarter per cent in the short term, with perhaps a little more later in the year."

The economy's recovery had been steadier and with lower inflation than was typical, he said. The gap between the Bank and the Chancellor on interest rates was small. "We are talking about differences of a quarter of a per cent."

In a speech to a Housing Corporation conference, Mr Davies warned that the Bank remained on the alert for any signs of a housing boom. A continuing "robust rise" would be a matter for concern, although he added that house prices remained low relative to earnings, and could rise a little while remaining consistent with the Government's inflation target.

"What we need to watch carefully, though, is any sign that the price acceleration is taking us into the kind of heady territory we explored in the late 1980s which, in retrospect, we know to have been an experience which was bound to end in tears and did," Mr Davies said.

He also predicted that the private sector would not be able to meet all of the extra demand for housing in the next 20 years. Planned cuts in public expenditure meant the short-term prospects for social housing were not bright. Housebuilding by housing associations was forecast to decline.

But referring to Department of Environment predictions that the number of households would increase by 4.4 million during the next two decades, mainly in the form of one-person units, he argued that the housing market would need to become more flexible, with a greater variety of types of tenure and sources of funding.