Interest rates may rise as housing market firms
Tuesday 24 December 1996
Mr George told Mr Clarke that the 0.25 percentage point rise which they both agreed to implement immediately on 30 October, to the surprise of the City, might have to be followed up with further increases to keep inflation under control.
The governor said that the quarter point "might well not be enough to moderate the upswing sufficiently to restore a better-than-even chance of achieving the inflation target over the next two years".
Mr George's warning came as renewed predictions of a strong improvement in the housing market were published by Oxford Economic Forecasting, which expected that house price inflation of 7 per cent a year could bring a sharp increase in house sales in the near future.
Building societies have been predicting a sustained recovery in prices, and economists have forecasted rises of up to 10 per cent a year over the next few years. But the key piece of evidence needed to show that the recovery is strong and sustained is a move to much higher turnover in the housing market, which has not yet materialised.
Turnover has been rising at about the same rate as prices, up 7 per cent on a year ago, but from a very low base of around 1.2 million transactions a year.
However, the Oxford institute said transactions could rise "fairly rapidly in the near future" to around 2 million at the end of the decade, not far short of the previous peak.
According to the minutes of the October meeting, the Chancellor said he "certainly did not want activity in the housing market to get out of hand and would watch it closely". Activity was picking up but sales of houses in London were distorting the overall picture, which remained patchy, he said. Demand was high and supply was restricted as homeowners kept their houses off the market in expectation of further increases.
Mr George said recent evidence showed overall inflation was less likely to be below the 2.5 per cent target "for any length of time in the short run". The Government has a medium-term target of 2.5 per cent for underlying inflation, which has been stuck at 3.3 per cent year-on-year for the past two months.
In an apparent reference to the political pressure to keep rates down ahead of the election, Mr George said "given present expectations about the constraints on policy, a quarter per cent move now could have a relatively strong signal effect on the credibility of policy".
That would reduce the size and speed of the rise in rates that might eventually be necessary to make the inflation target secure and sustain the economic expansion.
Explaining the background to his recommendation of the October increase, Mr George said the need for tightening was urgent because output was growing above trend and the expected fall in price inflation had failed to happen.
Comment, page 13
Children's bookseller wins The Independent's new author search
Board creates magnetic field to achieve lift
- 1 Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
- 2 Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
- 3 Former East 17 frontman Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Paralysed man Darek Fidyka walks again after treatment by British doctors on brink of 'cure'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Jose Manuel Barroso warns David Cameron against making 'historic mistake' over immigration reforms
Worst Airports of 2014: Poll names Islamabad airport in Pakistan worst in the world
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...