Tug of war: Home prices are up, consumer prices are down. What will the BoE do?

Wonder what the Bank of England is going to do about this.

The latest official data shows that inflation (consumer prices) slipped to 1.7% in February from 1.9% the previous month. That is the lowest reading of inflation in a little over four years.

However, housing data showed that house prices across the UK climbed 6.8% in the year to January, up from 5.5% in December. London property prices, in particular, jumped 13.2%, the biggest gain since July 2010.

So, now BoE governor Mark Carney faces a dilemma: the central banks faces pressure to consider both keeping rates low for an extended period, as well as tighten monetary policy.

Low consumer prices could provide a reason for the central bank to consider keeping rates low longer than expected; however, the fact that house prices are rising provide a case for tightening interest rates to prevent prices from soaring into a bubble.

Unfortunately, higher rates could threaten the ongoing economic recovery.

Of course, in reality, it is unlikely that there will be any interest rate hike in the near future, even though the UK, with improving economic prospects, is the most likely to become the first to eventually raise interest rates among developed nations.

The uneasy combination of low consumer prices and rising housing prices is likely to trigger debate within the BoE about the appropriate course of future monetary policy action.

It must be noted that using monetary policy to prick asset bubbles (by raising interest rates) is not conventional economic wisdom.

There are some proponents of the idea; notable among them being US Federal Reserve governor Jeremy Stein, who firmly believes that asset bubbles are a good enough reason to turn monetary policy tighter.

The question is, which way will the BoE lean? We’ll be finding out more in the months ahead.

For now, the BoE is likely to stay put.

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