Fears of an imminent rise in interest rates to curb the housing boom receded yesterday after the Bank of England said that higher rates would be unlikely to stop people borrowing.
Charlie Bean, the Bank's chief economist, said it was "extraordinarily difficult" for central banks to take effective pre-emptive action against asset price bubbles. He warned that any long-term benefit in terms of lowering debt levels had to be weighed against the immediate negative impact on the rest of the economy.
"One has to balance the relatively certain short-term costs in terms of foregone output and an undershoot of the inflation target against the more uncertain medium to long-term gains," he said.
The Bank recently made public its concern over rising debt levels, prompting speculation that it might use monetary policy to deflate them. But Mr Bean said raising rates was unlikely to be the right tool.
"It is not clear that an increase in interest rates would have much effect on future debt levels," he told an audience of economists in Switzerland yesterday. "Household expectations about their future circumstances are probably more important, and they may be impervious to changes in official interest rates."
He also played down fears that the housing market was in the grip of a bubble, saying there were fundamental economic reasons behind the recent surge in prices and borrowing levels. Lower inflation and interest rates, competition in the mortgage market, increased home ownership and a lack of new house building had all combined to push up the price of houses, he said.
"In sum, there are good structural reasons why the ratio of house prices to income should have risen," he said.
But he said it was still possible house prices had risen more than was justified by fundamentals while some borrowing might be based on over-optimistic assumptions of future prospects. He said this was hard to guage from the evidence, but added: "Nevertheless, prudence dictates that such a possibility should be factored into the policy decision."
Ironically, his speech coincided with a City seminar held to launch a book by Roger Bootle, the economist most closely associated with forecasts of a house price crash.
Mr Bootle, whose consultancy Capital Economics forecasts a 20 per cent slump in prices over the next three years, argues the UK is in the grip of a speculative bubble. In his book, Money for Nothing, he writes: "Once the property market has come down to earth, people will have to face the awful truth - no more money for nothing."Reuse content