BANK OF ENGLAND governor Mervyn King's assertions yesterday that he is unhappy with the switch to me...
BANK OF ENGLAND governor Mervyn King's assertions yesterday that he is unhappy with the switch to measuring inflation according to the HICP index rather than the RPIX index has put the institution on a collision course with chancellor Gordon Brown says The Daily Telegraph.
The problem is that housing costs are excluded from HICP, which could lead the bank to cut rates un-necessarily even if it is asked to lower its target rate to 2% from 2.5%.
"Many people will think it a little bit strange to have an inflation measure which excludes house price inflation," the Telegraph writes.
"He said changing to the harmonised index could be as if 'David Beckham had taken a shot at the goal, only to discover someone behind had moved the posts'. Mr King warned that in exceptional circumstances, HICP 'might lead to a different path in interest rates' and he planned to discuss the matter with the Chancellor and the Treasury 'when they come back from holiday'.
THE TIMES WARNS that the bank's statements yesterday were the clearest yet that the UK could face a housing crash if interest rates were forced up again.
"Mervyn King, the new Governor, used his first big public appearance since taking office last month to point out that households with rising debt burdens were vulnerable to a financial shock such as a fall in income," the paper writes.
"Mr King said that borrowers would be wrong to assume that real incomes would continue to rise at the rapid pace of the past. The strength of sterling in the late 1990s had kept import prices low and so had helped to improve real incomes. This was unlikely to be repeated, he said"
THE SCOTSMAN'S VIEW is that King fired "two warning shots" at debt laden consumers yesterday, putting more pressure on Gordon Brown's spending plans.
Betting on earnings growth and betting on inflation breaking down the value of mortgages – as happened to the previous generation of homeowners – were dangerous bets to take in the present climate, the paper reports King saying.
Still, the risk of sharply rising interest rates was not so dangerous that the Bank would tell consumers "not to borrow".
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