LONDON Price rises in most parts of Britain's economy are cooling but a red-hot property market is raising questions about whether the Bank of England will be able to keep rates low for as long as it would like.
Official data on Tuesday showed consumer price inflation slowed to 2.8 percent last month, moving closer to the central bank's 2 percent target. However, house price inflation - which does not feed directly into the consumer price index - sped up.
A July survey from the Royal Institution of Chartered Surveyors found the fastest growth in house prices since 2006. Official data showed house prices in London, which typically lead the rest of the country, jumped 8.1 percent in June compared with the same month a year ago.
Britain's central bank pledged last week to keep rates at a record low until unemployment falls to 7 percent - something it does not expect to happen before 2016 - as long as this does not threaten inflation expectations or financial stability.
While the BoE's new boss, Mark Carney, has played down concerns about rising house prices, signs the market is overheating could force the central bank to raise interest rates from their current 0.5 percent earlier than planned.
"The recovery in the UK housing market and rising house price inflation will simply add to the Bank's concerns that it might need to nip any impending housing bubble smartly in the bud," said David Brown at New View Economics.
"It is no surprise that the UK pound is starting to get a better spring in its step versus the dollar. The market is starting to get a strong whiff of an early rate rise."
LOW FOR HOW LONG?
Sterling rose after Tuesday's data as investors increasingly bet that the Bank would start raising rates in 2015 - a year before the BoE's guidance suggests.
How much the other eight members of the Bank's Monetary Policy Committee worry about house prices will become clearer on Wednesday, when minutes of this month's policy meeting are published.
Analysts expect the vote to implement so-called forward guidance was unanimous, but reckon the knockout clauses allowing the Bank to raise rates earlier were included in order to keep the more hawkish members of the committee on board.
"We will look to the minutes to see how concerned some policymakers were about credibility, as well as further signs of controversy over the setting of the threshold level," said Philip Shaw at Investec.
Britain is one of the few major Western economies facing the problem of above-target inflation but the BoE is confident that price pressures will ease over the next two years - although it has been wrong before. Core inflation, which strips out volatile food and energy costs, has already returned to 2 percent.
Property inflation, however, could be harder to tame.
The second phase of the government's Help to Buy scheme - which offers state-backed mortgage guarantees - will come into force from January. Despite criticism from the International Monetary Fund, Britain's Office for Budget Responsibility and a senior minister, the government has insisted the scheme will last for three years, as planned.
Data released on Tuesday showed the first phase of the scheme, which offers interest-free loans on new-build purchases, was proving popular with buyers. The government said 10,000 new homes had been reserved by buyers under the scheme since April.
(Editing by Catherine Evans)