Call for big interest rate rise next week

A larger-than-expected rise in interest rates should be announced next week according to a think tank, which said that the “rather leisurely tightening of monetary policy” had done “little to ensure that inflation is not expected to rise sharply”.

The National Institute of Economic and Social Research (NIESR) said there was a strong case for the MPC to influence expectations more forcibly by raising the repo rate by half a percentage point to 5 per cent when it meets in August.

A 'sharp shock' type of interest rate rise had been talked about before however, and was discounted by most members of the MPC.

House prices are 30% too high

The report also said the main risk to economic growth over the next few years is a decline in house prices, which are 30 per cent above their underlying value.

It said a return to long-run house price levels would cut economic growth by about a quarter of a percentage point a year over the next four years. The NIESR forecast UK economy growth of 3.3% in 2004 and 2.7% in 2005.

The NIESR expects the housing market to come to a soft landing - with house price inflation of 9% during 2004 and 1.5% in 2005 - rather than crash deeply as in the early 1990s.


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