Governor against rate cut to pre-empt housing crash

The Bank of England should not cut interest rates to offset a crash in house prices that might never happen, the Governor, Sir Edward George, said last night.

In an upbeat speech that appeared to diminish hopes of a rate cut next month, Sir Edward said he doubted consumers would suddenly "run for cover".

But he left the door open for a cut, saying the Bank would "review intensively" its optimistic growth forecasts ahead of its monetary policy decision on 6 February.

Sir Edward told an audience of Scottish bankers in Glasgow the US economy was "underpinned", there were prospects of growth in export markets, there was a "better tone" in equity markets and signs of a pick-up in hi-tech investment spending.

"This moderately positive external environment should, looking forward, bring a gradual pick-up in external demand and help to stabilise and subsequently improve the prospects for UK business investment," he said.

But Sir Edward said the "key question" was whether consumer demand would fall away abruptly or moderate more gradually. He criticised the view held by those whom he dubbed "gloomsters", who focused on the potential threat from either a surge in either interest rates or unemployment.

"To my mind these arguments have a degree of circularity," he said, pointing out that unemployment would only rise if consumer spending slumped – in which case rates would be cut.

"So it is not obvious to me at least that the household sector will suddenly run for cover in the current environment, where the labour market remains remarkably robust.

"It would be unwise, as some have implied, to set monetary policy on the basis of the worst possible outcome, even if one knew what that would actually mean in policy terms."

His remarks came as a mortgage lender highlighted the strength of demand for buy-to-let properties, and said there was no sign of a slowdown. The number of investors almost doubled last year, attracted by low interest rates and surging house price values, according to UCB Home Loans, a subsidiary of Nationwide Building Society.

More than 130,000 buyers borrowed about £12bn last year, compared with 72,000 and £6.9bn in 2001.

Charles Reed, UCB's managing director, said demand had been spurred by last year's 25 per cent surge in house prices.

He said the market had peaked in large parts of London, Bristol, Bath, Brighton and parts of East Anglia. This follows reports from two estate agencies last week that rents in central London fell last year at the fastest rate for a decade.

"We are now seeing interest in buy-to-let property spreading out from London and the South-east," Mr Reed said. "The greatest growth can now be seen in more Northern areas, where house price growth has been catching up over recent months."