King's new house price warning

BANK of England Governor Mervyn King has repeated his warning on house prices. However, he also insisted that the monetary policy committee has not abandoned its steady approach to raising interest rates.

King and other members of the MPC appeared before the Commons Treasury Select Committee today. He said: 'After a year in which house prices have risen very rapidly... the chances of house prices falling are greater than they were.'

King said it would be unfortunate if people only make decisions based on the assumption that house prices only rise.

In a speech to the business leaders in Scotland last week, King said it was 'clear the chances of falls are greater than they were'.

When asked today by MPs if the MPC has abandoned its gradualist approach to monetary policy, King replied: 'No chairman, I don't think we have. We never said that gradualism was increasing interest rates by 25 basis points every three months.'

A back-to-back rise in interest rates in May and June was the first consecutive rise in four years. The base rate has risen from a low of 3.5% last autumn to 4.5%. Economists expect rates to end the year at between 5% and 5.5%.

Minutes from the MPC's monthly meeting, released yesterday, revealed members had considered a half-point hike in May.

King told MPs he thought such a rise could have been warranted by the inflation forecasts in May but that it might have been mistakenly interpreted by the market.

'When we were able to explain our reasoning and thinking through the inflation report and the minutes of our main meeting then I think the markets understood that we haven't changed our basic strategic approach, what we had changed was our view about the outlook for inflation,' he said.

Marian Bell revealed that she was the MPC member who had thought the June decision to raise rates was more finely balanced than the rest of her colleagues, though she joined them in unanimously backing the quarter-point move.

Most economists continue to expect the next rate rise to come in August rather than July.

THE manufacturing recovery lost some steam in June, with orders and output expectations falling, the CBI said today.

Its monthly industry snapshot showed a net balance of minus 6% of manufacturers saying order books were above normal compared with plus 1% in May.

However, the CBI said the deterioration was not enough to suggest a threat to the sector's recovery. It said manufacturers were benefiting from improving conditions globally but struggling with strong sterling and rising interest rates.

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