It is not the MPC’s job to control house prices, any more than it is our job to control share prices or the exchange rate; but just as we would not ignore the wider economic effects of a high exchange rate or a boom in the stock market, so we cannot, and do not, ignore the influence of soaring house prices on consumer spending and hence on the overall pressure of demand. Much attention has been paid to the historically high level of house prices relative to earnings, and what this might mean for the future path of house prices. A less discussed question - of more interest to you - is how much influence the current strength of the housing market is having on household spending; and what impact a weakening in the housing market might have on consumers. 2  BIS Review 41/2004  Healthy as household spending has been in the last few years, there has not a consumer boom on anything like the scale of the late 80s, when house prices last took off. Since early 1998, house prices have risen sharply relative to incomes; but household spending has only grown broadly in line with incomes. A buoyant housing market may still have had some influence on spending; and spending and house prices may have been influenced by some of the same factors. But spending and house prices do not seem to have moved together as closely as they have done in the past.
Monetary policy decision Before commenting our decision today, I would like to point out the changes that are shaping our current environment. In December 2005, when the present cycle of interest rate hikes began, we were concerned with the normalisation of the interest rate level – at the time the Libor was at 0.75% – while allowing the economy to reduce its level of unused resources. Our concern now is to ensure that monetary conditions are such that the healthy state of the economy does not jeopardise price stability in the medium term. We are still observing that the competitive pressure in the market is high, the labour market very flexible and that movement in the monetary aggregates is moderate. However, my analysis of the current situation has demonstrated that the inflation outlook has deteriorated in different respects since our last assessment: higher oil prices will have an impact on the consumer price index; economic performance, which is better than expected, will result in an improved utilisation rate and increase pressure on prices and, finally, a renewed weakening of the Swiss franc has neutralised the intended tightening in monetary conditions. Today's decision to raise the target range for the three-month Libor by 25 basis points takes into account this deterioration in the outlook for price stability. Inflation forecast graph I will now turn to the last part of my remarks. What is our inflation forecast?