In his inflation report press conference yesterday, Mervyn King, the Bank of England’s deputy governor said the Bank expects house price growth to fall from 25 per cent in the past year to zero over the next two years.

"The leading indicators show that has started," he said. "But it is important to realise that we are not forecasting a fall in the level of house prices, merely the rate of increase."

“Real disposable incomes are likely to grow more slowly in the future. House price inflation seems to have passed its peak, and in due course that will reduce the stimulus to spending from mortgage equity withdrawal.”

He dismissed rumours that last week's interest rate cut was aimed at bailing out a troubled financial institution. "It was not done for reasons of financial stability," he said.

Commenting on last week’s interest rate cut, Mervyn King said:

“Although inflation has picked up since November, the factors behind that rise are expected to be temporary. Hence the Committee was faced with an outlook in which, looking two years or so ahead, the odds were that, in the absence of a reduction in interest rates, inflation would have fallen below the 2.5 per cent target. That is the explanation of last week's decision.

The Bank seems to have challenged the Chancellor’s outlook for the economy, saying it had shaved its growth forecast for Britain next year from 3 per cent to 2 per cent. That is worse than the 2.5 per cent the Bank is expecting for this year and significantly below the surge to 3.25 per cent growth predicted by Mr Brown for 2004. Any growth shortfall is likely to widen further the growing deficit in the Government's finances.

Earlier this month, both the accountancy firm BDO Stoy Hayward and the National Institute of Social and Economic Research also suggested Mr Brown's predictions had been too optimistic.