MPC "surprised" by property price growth

01 July 2004
Continued upward momentum on house prices was a "very important" factor at the heart of deliberations on interest rate decisions made over the past few months, Mervyn King, the governor of the Bank of England, has said.

In an interview with The Financial Times, marking his first year since taking over from Sir Edward George, Mr King said there was a real prospect the Bank's monetary policy committee (MPC) would push up interest rates further to take the steam out of the property market.

"If we saw for example that we really were running the risk of a big deviation of inflation from target further ahead, then we could take that into account and would do so," he said.

Mr King said the MPC had been "surprised" over the past few months at the rate at which house prices had surged.

"House prices in the last two or three months have been very important to our judgments, because they have represented some of the most important pieces of news."

He added the housing market was "one of the factors underpinning buoyancy in consumer spending, and that's affected our judgment about where total demand is going and hence inflation."

Mr King said the MPC wanted to bring property prices down to more sustainable levels without precipitating an unrecoverable housing crash.

"We sat down and we asked ourselves, is this [rise in house prices] telling us that there has been a change upwards in the sustainable ratio of house prices to earnings, compared with what we thought a year ago. And we thought not.

"If we felt that the housing market was likely to create significant downside risks that would at some point in the future threaten the inflation target because it would lead to a shock to consumer demand, then that is something we would take into account," he said.

Mr King's comments come as Alan Greenspan, chairman of the US Federal Reserve, with an eye on inflation, increased interest rates by twenty-five basis points.

The move takes the cost of borrowing off its 45-year low of 1 per cent to 1.25 per cent; it is first rise in four years.