King prepares to face music on rates

Mervyn King, governor of the Bank of England, may have more on his mind today than how Aston Villa, of which he is an ardent fan, got on at the weekend. He is facing a quarterly press conference on Wednesday which promises to be even more interesting than usual, if you are a sad economics hack, at least.
That is not just because it comes just after an interest rate rise, which is of itself a fairly infrequent occurrence these days. This time King could to face a grilling about whether the Bank is just targeting inflation, as is its remit, or - as many pundits suspect - is trying to deflate the housing market gently before the bubble bursts spectacularly.
King, intriguingly for someone on his feet, holds a rehearsal on the day before the press conference in which Bank economists throw the sort of questions at him they think he may face.
While that level of preparation may flatter journalists, he will no doubt be expecting house prices to dominate the hour-long event.
Members of the Bank's monetary policy committee have long maintained that it is their job to keep inflation across the economy as close to its Treasury- set target as possible. They are not in the business of trying to control house prices or, for that matter, prices of any other assets such as stocks, they say.
But some economists are not so sure. With inflation at 1.1%, well below its 2% target, they quarter at its long-term trend rate, there is little need for the MPC to be raising rates right now.
King will no doubt argue on Wednesday that the MPC targets inflation two years ahead because that is about how long it takes for rate changes to affect the economy.
But the statement the MPC issued with last Thursday's rate decision made it clear house prices - surging at nearly 20% annually - are a worry. "Retail spending continues to be robust, underpinned by income growth and unexpectedly strong house price inflation," it said.
The truth seems to be that the MPC is uncomfortable with rates still below their neutral level while the economy and house prices are rising at nearly 20 times the rate of inflation.
"It is possible that the MPC has started to interpret its inflation remit more flexibly. It may be seeking gradually to raise interest rates back up to a neutral level [often thought to be about 5-5.5%], in particular as a way of taking some steam out of the housing market," says economist Roger Bootle.
If you were the central bank, you would probably figure there was more downside to a house price crash than to cutting yourself a little slack for a while on your remit to try to take the froth off the housing market. Gordon Brown is hardly going to grumble if the MPC saves him taking the rap for a housing slump.