Alarm over house-price surge

AN interest-rate increase is needed soon from the Bank of England to counter a looming threat to Britain's economic revival from huge household debts, a report from the Organisation for Economic Co-operation and Development (OECD) claims today.

There is a risk that house prices may surge again in the short-run instead of slowing down, causing sharp falls when the market eventually cools, it says.

This could hammer Britain's growth prospects just as it is well placed to take advantage of the global recovery and benefit from a revival in world trade.

'There is now a compelling case for raising interest rates further on the grounds of impending inflationary pressures and the case for doing so is further strengthened to the extent that an early and more gradual tightening would reduce the risks of an abrupt correction,' the report says.

The Bank of England's rate-setting committee raised the cost of borrowing to 3.75% in November last year and analysts in the City believe there is a strong chance rates will rise to 4% next month.

The OECD's Economic Survey of the UK claims that the booming housing market has fuelled the highest jump of any G7 country in the level of household debt as a percentage of both disposable income and financial assets.

It states that in a scenario where house prices fall abruptly by 20% next year, the knock-on effect on consumer confidence and consumption could knock one percentage point off GDP growth in 2005.

In its own growth projections the OECD believes the UK economy will grow by 2.75% next year and by 3% in 2005 - slightly below Chancellor Gordon Brown's own forecasts of between 3% and 3.5% in both 2004 and 2005.

In a major endorsement of Brown's economic policy, the report says Britain's recent macroeconomic performance has been impressive, with the economy outperforming the eurozone.

Tuition fees plan welcomed

TONY Blair's controversial university top-up fees plan was praised as both 'innovative and welcome' by the OECD. In a major boost for Blair, the OECD said there was a clear case for such a scheme and that it was fair given the gains that students passing through higher education enjoy.

The average economic return to individuals taking higher education in the UK is probably the largest in the OECD, it added. 'Given the growing constraints on public finances, it would be difficult to raise large amounts of extra funding for British universities via general taxation,' it said.