Mervyn King, the new Governor of the Bank of England, yesterday criticised the Government's decision to impose a new inflation target in a move that threatens to open a split between the Bank and Treasury.
He said it was "strange" to have an inflation target that did not include house prices and warned it could be seen as "moving the goalposts".
Mr King also said the Government would miss its optimistic growth forecasts for the next three years, adding to a chorus of doubt over Gordon Brown's economic forecasts.
The Governor was unusually outspoken in his criticism of Mr Brown's decision to impose the European harmonised index of consumer prices (HICP) in place of the retail price index excluding mortgage costs (RPIX).
The comments overshadowed the publication of the Bank's latest inflation report that left the door open to further cuts in interest rates.
The Government is expected to announce a new inflation target in November's pre-Budget report. City analysts expect the HICP rate to be set at 2 per cent rather than the current RPIX rate of 2.5 per cent.
Tuesday's inflation figures showed HICP at 1.3 per cent - below the likely new target - but RPIX came in above the target at 2.9 per cent.
Mr King said the switch would pose "presentational problems" in explaining how inflation was one moment above target but falling and then "in a blink" below target and rising. "Explaining policy is crucial in terms of anchoring expectations close to target," he said. "It could seen as moving the goalposts." He said the Bank has advised the Government not to make the switch in the spring because the gap between the two measures was so wide. But he said the current "very large" gap of 1.6 percentage points was still a "particular concern".
The Governor's main worry was that the monetary policy committee would be unable to take account of house prices as the HICP deliberately excludes that from its measurement. "It is a bit strange to have a measure of inflation that does not include a measure of house prices in it," he said.
Mr King pointed out HICP had been below 2 per cent for the last two years - a time when the housing market was booming. "It would have been unfortunate if we could not take into accounts factors that clearly related to household consumption and domestic demand," he said.
Eurostat, the European Union's statisticians, is piloting a new version to include house prices in different countries.
"But it will be a considerable time before the results of the pilots will be known," said Mr King, adding that once house prices were included it meant the inflation measure would "change again".
Michael Saunders, European economist at Citigroup, said: "My clear impression is he would prefer the target not to be changed at the moment."
The Bank of England's new forecasts suggest Mr Brown will struggle to hit his growth targets of 2-2.5 per cent this year and 3-3.5 per cent in 2004 and 2005. Mr King said the Bank's forecasts were a "very small amount below" the Treasury's lower figure.
The report itself lowered the Bank's forecasts for growth and inflation. "Relative to the central projection the MPC judges that the overall risks to growth and, to a lesser extent, inflation are on the downside," it said.
Mr King played down the importance of recent strong data and defended last month's decision to cut rates just ahead of the Bank's own figures showing consumer lending had hit an all-time record in June.
City economists said the report would dampen speculation of an imminent reversal of July's rate cut.
"There is no suggestion that the bank now sees the last move as an error," said Adam Cole, senior economist at Credit Agricole. "The first tightening remains many months away."Reuse content