Bell urges Bank to focus on deflation, not housing boom

The Bank of England should worry about deflation rather than the unsustainable boom in the housing market, a member of its Monetary Policy Committee (MPC) said yesterday.

Marian Bell said the threat of deflation was a monetary event that the Bank should watch although she added that she did not believe there was a great threat of "pernicious" deflation in the UK.

In contrast she said the Bank should not target house prices. Taken together the comments will boost hopes of further cuts in interest rates.

"Deflation is a monetary phenomenon and it's quite clearly the job of the monetary policy authorities to prevent a pernicious deflation occurring, for, to use a well-known phrase, prevention is better than the cure," she said.

She said the risk of deflation was "not high currently", but told members of the Confederation of British Industry in Sussex: "Rest assured that, should it threaten, deflation is something that the MPC should, can, and I am sure, will do something about."

Rumours of global deflation – where prices fall sharply, rates are cut to zero and demand collapses – have been building in recent months. Central banks can only respond by pumping liquidity into the economy to encourage consumers to start spending.

Japan is in a deflationary trap and there are fears that Germany is in danger of falling in it although Ms Bell said she believed the European Central Bank would act to prevent it.

She added it was just as undesirable to have inflation below the Government's 2.5 per cent target as above it. Inflation has been below target for three years and her comments indicate she might be prepared to vote for a rate cut to bring it back to target.

Her comments came as official figures showed that prices of raw materials used in industry tumbled last month at their fastest rate in three years.

Input costs fell 3.4 per cent in November, thanks to a 14 per cent drop in the price of oil products. On an annual basis they are down 0.9 per cent.