Bank of England 'Caught' Not 'Paralyzed'

The recent downturn in the UK economy is likely keeping Bank of England hawks at bay, according to former Monetary Policy Committee member Charles Goodhart, CBE.

"If it wasn’t for the fact that the economic conditions are seemingly worsening, with the housing market declining sharply as well as the financial services sector, the MPC might even have thought of putting rates up," Goodhart, who was an external member of the MPC between 1997 and 2000 and is currently Professor Emeritus of Banking and Finance at the London School of Economics, told CNBC.com.

With an enormous decrease in volumes of mortgages and transactions (only this week the Bank of England released official figures showing approvals fell to a record low in April) and concerns about banks, the MPC is "caught" not "paralyzed," Goodhart said.

And while admitting that two weeks ago he might have envisaged a 25-basis-point increase in rates as a symbol of determination to maintain stability, the situation has "darkened and will be dire for the next couple of years," he said.

"It is essential that the bank maintains inflation anchored, they simply cannot cut," he added. "To lower interest rates now would be a greater mistake than to raise them."

It would also be wrong to adjust the inflation target, because the real problems of adequacy lie in the index, Goodhart said. Housing should go back into the consumer price index, he added.

© 2008 CNBC.com