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'Rates must rise' to check house price inflation

The Ernst & Young Item Club used its autumn forecast published today to press for a rise in rates to 5% next month to bring house prices back under control.

The influential group of economic forecasters said the UK economy is looking very buoyant, having been bolstered in recent months by a significant rise in the number of older and retirement age workers, as well as migrant workers, which has boosted the labour force; a buoyant FTSE; healthy retail sales figures and rising house prices.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said, “The UK economy is expanding quicker than many of us anticipated – but it can go faster.”

“However, interest rates need to be raised again in November to stop credit expansion and asset price inflation spilling over into excessive demand and inflation. If house prices continue to accelerate, interest rates will have to rise further in 2007.”

Most analysts expect the Bank of England's MPC to raise interest rates to 5% at next month's meeting.

The Item Club now expects the economy to grow by 2.9% next year, compared to its previous 2.6% forecast.

The report said the stronger growth figures had handed Brown a tax boom with extra revenues from the likes of stamp duty. However, Spencer said public spending was also higher than expected, making little overall difference to the Treasury's books.

“It certainly looks like Lady Luck has come back to cheer the Chancellor up, just as it appeared she had given up on him,” Spencer said. “The Treasury, after missing its targets last year, adopted more conservative forecasts in the March Budget and Mr Brown will be able to make much of this growth spurt in the PBR. However, the public spending figures are already higher than projected. The Treasury may be benefiting from extra tax revenues, but the public purse is still empty.”