Bank of England urged to raise rates

Andrew Smith, the chief economist at KPMG has urged the Bank of England to act now to moderate the housing boom.

09:42 05 May 2004

Andrew Smith, the chief economist at KPMG has urged the Bank of England to act now to moderate the housing boom.

The Bank's Monitory Policy Committee is currently meeting to decide if it will raise the UK's base rate of interest. If this is raised then mortgages will become more expensive as the cost of borrowing increases.

But this is not the primary concern of the Bank - which seeks to regulate inflation.

"Various members of the MPC have been at pains to stress that they are increasing interest rates not to slow house prices per se but to prevent consumer price inflation rising above target over the two year time horizon," Mr Smith said.

"But the lower inflation goes now, the more difficult it is to square monetary tightening with that objective."

KPMG - the global audit, tax and advisory service - feels concerns should really be on a housing market's bubble burst creating a massive downturn in the UK economy.

Mr Smith said: "You could argue that, rather than the house price boom fuelling inflation, the real concern should be an eventual house price bust fuelling deflation if consumer borrowing and spending consequently go into reverse and the economy slumps."

Therefore, the real problem for Mr Smith lies in securing a level of moderation to reduce the possibility of future catastrophe: "On this reasoning, the real risk is undershooting, not overshooting, the inflation target in the longer term unless the housing and borrowing boom moderates soon."