19 Sep

House price falls may cause inflation undershoot, MPC member states

House price falls may cause inflation undershoot, MPC member states

A member of the Bank of England's monetary policy committee (MPC) has stated in a speech that inflation may undershoot its target if house prices are allowed to fall too much.

While suggesting that prices may "adjust" at the same time as prices and incomes recover, MPC member Spencer Dale said there could be an impact if house price falls cause credit conditions to tighten further.

He stated: "There is a risk that the continuing adjustment of the housing market amplifies the impact of the tighter credit conditions by more than I expect, resulting in a protracted period of weak consumption spending."

Such a consideration may be a factor in persuading the MPC to cut interest rates and help ease the cost pressure on mortgages, thus enabling the housing market to bounce back sooner.

In his speech to the Liberal Democrat conference this week the party leader Nick Clegg advocated a monetary policy directly linked to house prices.

This could mean instructing the MPC to target the retail prices index rate, which includes house prices, rather than the consumer prices index, which does not.
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