MPC 'dove' highlights fears over falling house prices

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The Independent Online

A member of the Bank of England's Monetary Policy Committee has indicated that further weakness in the economy caused by the credit crunch could lead the Bank of England to ease rates faster – even in the face of inflation "considerably above the 2 per cent target for much of the rest of 2008".

In a speech last night, Kate Barker, an external member of the MPC and regarded as "doveish", said that "a period of above-target inflation, driven primarily by global factors, is not necessarily a concern... There is little that monetary policy can now do to dampen this peak".

Ms Barker declared that "my chief concern is the significant possibility of a large downside risk to growth, and therefore to inflation, as the impact of credit tightening works through the economy".

Ms Barker drew particular attention to the dangers in the property market, saying that the scale of increase in house prices "is difficult to justify", and "falls in nominal terms cannotbe ruled out".

She highlighted the plight of "less high-quality" borrowers coming to the end of cheap two-year fixed-rate deals now, around 1.5 million, according to the Council of Mortgage Lenders.

Generally, she said, "the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders' balance sheets, reducing lending capacity further". The MPC may need to be "unusually flexible" in the coming months, according to Ms Barker.

Ms Barker's remarks follow those of Timothy Besley, another external MPC member, who made a surprisingly "doveish" speech on Monday. They also echo the view expressed last week by the Governor of the Bank, Mervyn King, that "inflation is, in the medium term, more likely to be above the target than below".

The minutes of the last MPC meeting, on 6 to 7 February, when rates were cut by 0.25 percentage points to 5.25 per cent, are published today.