Brown hints at rate rise to curb home price boom

Gordon Brown today gives his strongest hint yet that the government believes the Bank of England may be forced to raise interest rates to prevent Britain's booming housing market from triggering inflationary pressures in the rest of the economy.

In an interview with the Financial Times before his annual Mansion House speech to an elite audience of City leaders, the chancellor spoke of the "difficult decisions" facing the Bank's nine-strong monetary policy committee.

"With this strengthening global recovery and domestic consumer demand already strong, against a background of historically low interest rates, the Bank will have tough choices to make in the coming months to ensure sustainable growth and the maintenance of stability," he said.

The Bank slashed rates to a 40-year low of 4% last year, to insulate Britain from the post-September 11 global slowdown. Lower rates kept consumers spending and the economy afloat, but also triggered a rush on cheap mortgage deals.

With the summer house-buying season only just getting under way, the overheating property market has already prompted alarm in the City. Earlier this week, mortgage lenders urged the Bank to raise rates to prevent a repeat of the boom-bust cycle of the early 1990s that left millions trapped in negative equity.

Mr Brown appeared to hint that the government would prefer the Bank to take preemptive action to avoid having to raise rates more drastically later should the housing market keep on rising.

"By prompt action and early action in the past the Bank has avoided the risk of stop-go instabilities," he said. "We will, as a government, continue to back the Bank in the difficult decisions that they have to make." As Mr Brown makes his speech today he will also be aware of a clamour of angry noises from industry leaders who yesterday warned that relations between the government and business have sunk to their lowest point for several years.

Digby Jones, the director general of the CBI, said he had never known the current level of "mistrust and fed-upness" with the government in the 30 months since he took over from Adair Turner, a New Labour fan and favourite.

His comments came the day after the CBI president, Sir John Egan, assailed ministers for piling taxes on to employers and treating them as "voteless cows to be milked".

Mr Brown is under pressure from business leaders to convince them that his forthcoming comprehensive spending review will not just throw money at schools and hospitals but will deliver genuine improvements in skills.

The business community is also incensed that, in his April Budget, the chancellor ramped up national insurance contributions - imposing a £3bn "direct tax on jobs".

Sir John, the former chief executive of Jaguar and BAA, said this came after Treasury ministers had increased taxes on business by £6bn a year since 1997. "The tax burden should be properly shared between business and the voter," he said. "Our message to government now has to be: you've gone too far. If you want the constructive partnership with business that has served you so well, treat us as partners and not as voteless cows to be milked."

In the FT interview the chancellor also insisted that the government would not be rushed into an early referendum on joining the euro by the recent falls in the pound.