In its quarterly inflation report, the Bank said that it was expecting house price rises to fall gradually to about zero over the next two years, but expressed concern for what might happen should the moderation be delayed.
Mervyn King, the Bank's deputy governor, said that the recent house price boom had taken the monetary policy committee, the nine-strong body that sets interest rates, by surprise. He said that the last time prices were rising at such a pace, in 1989, they were falling within a year.
"The committee continues to believe that house price inflation is likely to slow soon, with prices becoming broadly stable by the end of the forecast horizon [two years' time].
"The longer the slowdown in house price inflation is deferred, the greater the slowdown is likely to prove."
Mr King added that it was impossible for the Bank to predict house prices with any certainty. "Although the committee's central projection is that consumption growth is likely to moderate, there are, of course, significant risks. In the short term these come from the momentum of household spending and, looking further ahead, from the growing risk of a sharp correction to house prices and consumer spending."
Forecasts in the inflation report showed the impact of rising house prices pushing inflation above the government's 2.5% target over the coming months, before easing back next year.
Mr King said Britain remained a two-speed economy. "Beneath the surface of overall stability lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand, on the other. The tension between these two components of demand creates risks to the outlook.
"Consumer confidence remains high, household borrowing has been accelerating, and the remarkable strength of the housing market suggests that the outlook is for spending to remain quite buoyant in the near term."
However, the Bank cited a number of risks around its central projections, including the possibility that the global economic recovery will falter or that higher national insurance contributions next spring could trigger a bout of wage inflation.
"The crystallisation of any of these risks could have material implications for the prospects for growth and inflation, and thus policy," the Bank said.
City analysts said the report did not indicate an early cut in interest rates, following the Bank's decision last week to leave borrowing costs at 4%.
"All in all, this is a broadly neutral report and suggests that a big downside surprise will be needed in the near-term dataflow to lead the MPC to cut rates," said Alan Castle, economist at Lehman Brothers.
"So we place a relatively low probability on an interest rate cut at the December MPC meeting," he added.
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