Kate Barker: The Bank's housing market expert who won't get boxed in on rates

Kate Barker is looking forward to her second three-year spell on the Bank of England's Monetary Policy Committee that begins in a few days time. As a fervent football supporter, she knows that managers have a habit of substituting players at half time.

Kate Barker is looking forward to her second three-year spell on the Bank of England's Monetary Policy Committee that begins in a few days time. As a fervent football supporter, she knows that managers have a habit of substituting players at half time.

Luckily for this career economist she became only the second person in the seven-year history of the MPC to be given an extension as an "external" member by Gordon Brown, the Chancellor and ultimate team selector.

"Yes I do feel I have made a contribution on a number of levels," she says. "Quite a lot of things that we talk about relate to business and sector issues, and I feel the knowledge I have had from my previous job at the CBI and within industry means I have been able to contribute in a direct sense."

Her eagerness to highlight her experience shows how much Ms Barker has established herself as a member of this powerful nine-strong committee that sets interest rates once a month.

When she joined she was condemned by some in the City a token woman replacement for DeAnne Julius and as a representative of industry because of her high-profile role as the chief economist for the then Confederation of British Industry.

But a lot of water has flowed under the bridge since then, not least the terrifying events on 11 September 2001 and its deleterious consequences for the global economy. "That was the start of what I would truthfully have to say was quite a difficult period when we had to ensure that confidence and the economy could be kept going," she says.

Fast forward to 2004 and the situation is very different with economic growth above trend, the housing market red hot, employment at an all-time high and interest rates close to 50-year lows.

The second half of her MPC session - assuming she is not given extra time - that begins on 1 June looks as if it will be challenging in very different ways.

Top of her list is the housing market. "It must be true that house prices cannot rise at close to 2 per cent per month but we have been talking about them being unsustainable for quite a long time. If you went back two years, our central projection for house prices was wrong," she says.

She points out that the impact of house prices on consumer spending has not been so strong, but adds: "The higher house price inflation goes, the higher the risks.

"We are worried about what happens further down the road if there's a major change in the housing market, and that's a more difficult question."

She admits the Bank's forecasts are beset with uncertainties but insists that is better than producing "glib" forecasts of a repeat of the housing crash of the early 1990s.

An acknowledged expert on housing following her year-long review of the housebuilding market, Ms Barker is keen to point out the two situations are very different.

"If you think back to the periods when house prices did decline, these were periods that came about because inflation generally got out of control and sharply rising interest rates, which took the housing market down a long way," she says.

"If you think of a period when the housing market rather than the economy as a whole gets out of kilter, there would not have to be those consequences because the body in charge of controlling inflation would not need to put up rates."

She believes the change in the labour market, which is now enjoying low unemployment and record employment, explains her confidence in the housing market as well as the reasons why people are happy to borrow.

"That perception must have an effect on people's preparedness to borrow and it is difficult to warm them about the danger of taking on debt if they are not afraid of losing their job," she says. "The difficulty for us is that we really have to get this right and be able to run the economy to avoid the sharp upward rise in unemployment."

She tactfully says some previous house price crashes were a "fallout from policy errors" and points out today's boom is partly driven by investors looking for a better return from their money than a bank account or the stock market.

"I think that will unwind and if that can happen in an environment when we haven't got sharply rising unemployment then we would be in a less difficult situation," she says.

Certainly communication - whether to homeseekers or the financial markets - has become an important part of the job. Some analysts have spotted a sea change from the old days under Governor Sir Eddie George, when each rate decision was taken based on the latest month's news - full stop.

Now the Bank seems to guide markets by using words such as "gradual" to indicate they would change rates only every quarter to coincide with their latest inflation forecasts.

Crucially the word "gradual" did not appear in the latest minutes, which also included a lengthy discussion of the merits of a half-point rate rise, triggering a surge in sterling and gilts as traders bet on rates shooting up to 5.5 per cent by the end of next year.

So have the markets got it right? "Given that it is apparent from the minutes that there was discussion of a 50 basis point rise and given the [inflation] forecast that showed an upward revision, the market is right to look at that and draw a conclusion," she says.

"But what we do depends on the news between now and next meeting and there's a lot of news to come between now and then. What we don't want to do is to get boxed in on what we are going to do in subsequent months.

"I certainly talked about a half-point rise. But I should say that I did not talk from the shock aspect. I'm rather dubious about the arguments about shock. I think I'm dubious about the whole business of boiling frogs - I don't find that very helpful."

Some analysts believe small and gradual rate rises will not affect consumers' spending and borrowing if given time to adapt - analogous to the fact that a frog in a pan of water will not notice the rising temperature until it is too late.

She said there was impact on consumers through higher mortgage payments whether that comes in one month or spread over three. "I'm not sure that if you really, really wanted to shock the consumer that half a point would do very much," she says.

The other key issue facing the MPC is the oil price, although the former chief European economist for the Ford Motor Company appears sanguine. "The knee-jerk reaction that petrol prices are going up so we will be raising interest rates is not right.

"There will clearly be upwards pressure on inflation in the short term but the key question is how likely that is to feed through to second-round effects and specifically to earnings," she says.

"The labour market is tight and the analysis in the inflation report is of wages picking up, but I am not convinced there will be second-round effects because of oil. Looking further ahead the impact on consumer spending would probably be negative."

She declines to give a figure for a neutral interest rate for the UK saying it would be "quite wide", although she intriguingly adds: "We may not be very much lower than the plausible bottom end of that range."

The only other question she dodges is on football. A fan of Stoke City, Ms Barker is a member of the Independent Football Commission that regulates the soccer business.

I ask whether she believes that a bidder for a club should have to pass the test of being a "fit and proper" person as a City bidder would, but - sadly - she rules the question offside.