Rates must rise if consumer boom does not slow, says George

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The Independent Online

The "unsustainable" boom in house prices will play a part in the Bank of England's decision on interest rates, the Governor, Sir Edward George, said yesterday.

In an interview published just hours ahead of today's Monetary Policy Committee meeting to set the cost of borrowing, Sir Edward said the Bank would hike rates unless consumer spending slowed.

However, virtually no economists expect the MPC to raise rates this week from the 38-year low of 4 per cent they have held for eight months.

"Domestic demand will have to moderate of its own accord. If it doesn't we'll have to put rates up," Sir Edwards told the Aberdeen Press and Journal.

"Housing is part of it, prices are growing at a rate which cannot be sustained for long and that will be taken into account."

His comments appeared to differ from those of his deputy, David Clementi, who said in April the Bank would not raiserates to quell a housing boom.

Figures this week from Nationwide building society showed house price inflation running at an annual rate of 19.8 per cent – the highest for 13 years. But a key factor behind the surge in house prices has been the Bank's decision to cut the cost of borrowing in order to avert a recession in the wider UK economy.

Despite its action, manufacturing is still in a deep recession and showing only hesitant signs of a return to growth, according to the latest surveys.

Overall economic growth is close to zero while business investment is falling and the growth in household spending has been revised down in the latest estimates of GDP growth. In addition, inflation is running at a historic low of 1.8 per cent.

Economists also point to Sir Edward's Mansion House speech last week when he said low inflation had given the MPC "a certain amount of time to assess the unfolding evidence".

Stephen Lewis, the chief economist at Monument Derivatives, said a far more potent factor would be the recent falls in share prices.

"The fall in equity prices has now gone so far, it is said to be undermining the solvency of some long-term investing institutions," he said. "Potentially, this constitutes a very serious threat to the economy."

He said the Bank would be fearful of triggering a crisis in the insurance industry – which would threaten wider consequences than a banking crisis – by raising rates.

Many analysts expect the first increase to come in August, which will coincide with the Bank's latest inflation forecast that will take account of the pound's fall against the euro.

The TUC called for a freeze in interest rates. John Monks, its general secretary, said: "With the markets still rebalancing after the WorldCom scandal, manufacturing still struggling on the road to recovery and inflation still below target, now would be a very bad time to put the brakes on the economy."

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