UK economy 'still at risk'

The MPC said on Wednesday that while it expects a recent upturn in UK economic growth to continue over the next six months, further economic weakness in the US and the eurozone, or a dip in property prices, could derail the recovery.

It said that while house prices should slow gradually, the risk of " a more abrupt slowdown" was greater the longer current house price inflation of up to 30% a year continued.

"The crystallisation of any of these risks could have material implications for the prospects for growth and inflation, and thus policy," the MPC said in its quarterly report on inflation.

Overstretched

Sustained double-digit rises in house prices have prompted homeowners to borrow money against their properties to fund consumer spending.

Economists fear that a sharp fall in the property market would curb this spending, currently one of the key drivers of economic growth in the UK.

At the same time, the manufacturing sector is teetering on the brink of its second recession in as many years because of weak export demand from the US and mainland Europe.

In the absence of a house price crash or a new economic slowdown overseas, the MPC expects UK inflation to rise above its target rate of 2.5% by the end of the year, fuelled by higher oil and property prices.

Inflation outlook

It said it expected inflation to remain above the target level for most of next year before edging lower again.

The MPC's job is to set interest rates so that the annual rate of inflation falls within one percentage point in either direction of that target rate.

The inflation forecast suggests that interest rates are unlikely to fall for the foreseeable future, although the MPC stressed that it would take 'prompt action' if necessary.

Last week, the MPC left interest rates on hold at 4% for the twelfth consecutive month, despite growing pressure for a cut to reinvigorate the flagging manufacturing economy.

The MPC's reluctance to cut rates reflects fears that cheaper borrowing costs would lead to further potentially inflationary house price increases.

Earlier this week, official figures showed that inflation had risen to 2.3%, its highest level since April.