BoE Governor warns of “several years” of house price stagnation

In an update on the UK economy, Mervyn King, Governor of the Bank of England, has warned that rising inflation and the global economic turmoil will reduce standards of living in British households.

According to the Consumer Price Index, inflation stood at a seven month high of 2.2% in January, with fuel inflation running at 19.3%, the highest level since records began in January 1997.

Mr King offered little comfort to homeowners struggling to meet mortgage interest payments buy indicating that further reductions in interest rates will occur during 2008, but not as many as economists have been expecting.

With regard to mortgage lenders, he said he was not surprised that the banks had not been passing on the cuts in the base rate and described the way in which they have been managing their accounts as “unwise”.

The Governor explained that: “In the three years up to last summer, despite the fact that we were raising interest rates, actually mortgage rates did not rise as fast … and some lenders were content to narrow the margins at which they were lending. It wasn’t entirely wise.”

Adding: “Now we are going through a period where the margin is being adjusted back to normal, so it wouldn’t be surprising if not all the full extent of interest rate cuts were being passed on.”

Turning to house price inflation, Mr King stated: “Looking several years ahead, there’s no reason to expect house prices to be markedly above where they are now. It’s conceivable there might be falls in house prices.”

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