BoE's Bean warns house prices could fall sharply By Reuters 14:03
LONDON, July 28 (Reuters) - Booming British house prices could fall sharply or equally remain just at their current level, a top Bank of England official warned on Wednesday.
BoE Chief Economist Charles Bean said house prices were a key uncertainty facing the Monetary Policy Committee as it tries to decide whether to take a gradual or more aggressive approach in raising interest rates from their current 4.5 per cent.
"There could be a sharp correction to house prices, but equally house prices could just stagnate for a while until earnings catch up," Bean said in a speech.
The BoE is expected to raise interest rates by a quarter point next week after holding off this month following back-to-back quarter-point increases in May and June.
Bean said the fact that inflationary pressures were building only slowly and uncertainty about the effect higher rates would have on house prices and heavily-indebted consumers suggested that borrowing costs could be raised gradually.
Against this he said that a desire for a smooth growth profile, and worries that the higher house prices climb the greater the risk of a crash, pointed to tighter monetary policy in the near-term.
He appeared to rule out voting in favour of a half-point rise in order to shock consumers.
"Aside from the fact that there is no empirical evidence to suggest that that a single large increase in rates is more effective than two smaller increases, we are not in any case in the business of trying to clobber the consumer," he said.
With data on Thursday expected to show outstanding consumer debt passed the trillion-pound mark in June, Bean played down the threat to the economy from rising household debt.
"While gross household debt has risen from about 90 per cent of annual personal disposable income in 1998 to about 120 per cent today, the household savings rate has not been unusually low - in fact it is less than two percentage points below its post-1963 average," he said.
While some households may have difficulties in paying back their debts, Bean said they represented only a small fraction of consumer expenditure and did not represent a threat to the overall macroeconomic outlook.
Bean also said that next month's Inflation Report would focus primarily on forecasts made on the assumption that interest rates follow the path implied by the market rather than being held constant as has been the norm.
