The Bank of England's fight against inflation is hampered by its refusal to target property or share prices, a former member of its Monetary Policy Committee said yesterday.
Charles Goodhart, who served on the committee between 1997 and 2000, said the Bank did not pay enough attention to house prices. Speaking at the Royal Economic Society conference, Professor Goodhart said asset prices typically property, shares and money had a "significant" impact on demand in the economies of the seven richest nations, including Britain.
His research, carried out with Boris Hofmann of Bonn University, found the housing market had a much larger impact than the stock market.
"Taking the UK as an example we show that ignoring property and equity prices leads to a sub-optimal outcome for the economy in terms of inflation," Professor Goodhart said.
"Their omission from the model introduces substantial biases, so that monetary policy [is] based on a mis-specified model of the economy."
The report is the latest to add to the debate about the threat the UK's booming housing market and its spiralling personal debt pose to the economy.
House prices are rising at an annual rate of almost 17 per cent, a level not seen since the housing boom of the 1980s, which ended in a crash. Meanwhile Britons are taking on a record amount of debt to take advantage of the lowest lending rates in almost half a century.
On Monday a separate report at the conference implied the Bank should learn the lessons of policy errors in the 1980s and start raising interest rates slowly now to avoid the need for sharp rises later.
The report showed households that had suffered from negative equity in the early 1990s were spending at a greater level than those who escaped the nightmare, implying homeowners had not been deterred by their experience.
However on the same day Sushil Wadhwani, a serving MPC member, said worries about debt levels were "overstated", pointing out the ratio of debt to income was not worrying. He said Bank rates would have to surge from 4 per cent to 11 per cent before the debt burden would be as unsustainable as it had been in the 1980s.Reuse content