The Bank of England is carefully monitoring Britain’s booming housing market as it weighs up the possibility that a rapid recovery from the Covid-19 pandemic will lead to a sustained period of inflation, one of its deputy governors has said. Sir Dave Ramsden said the Bank expected price pressures to be temporary but he and his colleagues on Threadneedle Street’s monetary policy committee were aware of the risks.
Ramsden, the deputy governor responsible for markets and banking, said: “There is a risk that demand gets ahead of supply and that will lead to a more generalised pick- up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”
Inflation, as measured by the UK’s consumer prices index, is at 1.5% and is expected to rise above its 2% target for a short period over the coming months. The average UK house price climbed 10.2% in the year to March, the highest annual growth rate since August 2007, with the stamp duty holiday pushing up demand. Ramsden said the Bank would not be complacent about inflation. “If it is not temporary we know what to do about that. We can push bank rate up from its historically low level (0.1%) and we know what that will do to demand.”
He said that while he was increasingly optimistic about the recovery, there was also a possibility that inflationary pressure may prove to be lower than anticipated if the economy slowed after an initial burst of post-lockdown activity. “That could happen if new variants emerge or we get psychological scarring, where some of the behaviour of the past 15 months becomes habitual. There is a risk that people will continue to be cautious.”
He added: “The uncertainties are less than they were but they haven’t gone away. Covid-19 is still with us and we are seeing that with the variants. The link seems to be on its way to being broken between cases and hospitalisations, and worse, but we can’t say for sure yet. We can’t rule out more variants and we have to bear that in mind.” He added that Threadneedle Street was seeking to use its £20bn holdings of corporate bonds to help the government achieve a net zero economy by 2050. The Bank wants to encourage firms to decarbonise but reserves the right to disinvest bonds to incentivise that transition.