Wadhwani says Bank is wrong on rates

Sushil Wadhwani used his last speech as a member of the Bank of England's Monetary Policy Committee yesterday to attack it for setting interest rates too high while also recommending that it signal a readiness to prevent a house price bubble by hiking rates.

Mr Wadhwani is regarded as die-hard "dove" on MPC, having voted for rate cuts in 16 out of 35 meetings. He leaves the committee, which sits monthly to decide interest rates, at the end of the month.

"If interest rates had been held modestly lower over the MPC period, then inflation would have been closer to target, the level of output would have been a little higher, and the path of output and inflation would have been more stable over the last three years," he told the National Institute of Economic & Social Research.

The MPC's remit is to ensure that inflation hits a Treasury-imposed target of 2.5 per cent.

In the Bank's quarterly inflation report published on Wednesday, it sharply raised its estimate of the chances that inflation would exceed the target in two years, and warned those projections could be revised further upwards. That prompted many economists to expect a rate rise as early as July.

Mr Wadhwani disagreed with the Bank's conclusions, saying higher energy costs and changes in the exchange rate no longer impacted retail prices as much as they used to. "A central bank that has acquired credibility can safely ignore the temporary price-level effects, and only react to the more enduring effects on demand," he said.

He went on to urge the MPC to consider saying something to curb the orbital property inflation.

"A clear signal from monetary policy makers that they would, other things being equal, react to a bubble if one clearly emerged would make the continuance of strong house price growth less likely now," he said.

House prices have risen sharply since the bank cut interest rates to a 38-year-low of 4.0 per cent in November.