House boom 'won't spark rate rises'

THE Bank of England today appeared to rule out using interest rates to dampen down spiralling house prices despite growing pressure on it to tackle house price inflation - currently running at about 18% a year.

In the Bank's quarterly inhouse magazine, published today, one of its own economists concluded: 'Asset prices are unlikely to be suitable as intermediate targets for a policy whose main aim is to control inflation.' The Bank is not denying that house prices are a cause for concern but it doesn't want to hit two birds - inflation and house prices - with one stone: interest rates.

According to the economist, house prices are already reflected in the retail price index and the Bank's monetary policy committee, which is responsible for setting interest rates, takes this into account when making its decision. From the Bank's point of view, the price of houses and other assets 'rarely give simple unequivocal messages for policy' because the links between asset prices and inflation 'depended on what was going on in the rest of the economy'.

Two former members of the committee, Charles Goodhart and Sushil Wadhwani, have argued that there should be more weight given to house prices when they are making up their minds. Today's article counteracts the tone of recent comments from the Bank. Last week, the Governor Sir Edward George warned that the Bank would raise interest rates if consumer spending did not show signs of slowing.

Deputy Governor David Clementi told the Treasury Select Committee last Thursday: 'The level of house price inflation is unsustainable and the longer it goes on the sharper is likely to be the eventual adjustment.'