The OECD said there is not yet any reason for the Bank of England to cut interest rates again. "Given that the level of output is currently close to capacity, that inflation has been increasing and is now above target and short-term indicators suggest growth may return to trend, there is not a compelling case for further rate cuts," the organisation said in a report on the UK economy. It said the Bank of England's decision to cut its repo rate to 4.50 pct from 4.75 pct in August already provides some insurance against downside risks which cloud the short-term growth outlook, such as the possibility of prolonged economic weakness in Europe, higher oil prices and a housing market downturn. The direct impact of higher oil prices is neutral for the UK, but they could have an indirect impact by reducing demand for its exports. The OECD said a 10 usd per barrel oil price rise and a resulting 2 percentage point drop in euro zone import growth would reduce UK exports by 0.5 pct and GDP growth by 0.25 pct, and such a scenario could eventually justify a further rate cut. "If the short-term outlook for the euro area remains weak or worsens further, and/or the higher oil prices are sustained or increase further, this would be likely to bring UK output clearly below potential and warrant a loosening of monetary policy," it said. Meanwhile, the risk of a sharp fall in house prices now appears to be declining, it said. "The risk of an imminent crash in nominal house prices appears to be receding. A more likely outcome is that ratios of nominal house prices to rents and earnings are gradually declining as house prices remain relatively flat and average earnings and rents gradually catch up," it said. It said previous housing market crashes have been preceded by sharp increases in interest rates of a magnitude which is inconceivable now, and while household debt is high, household interest payments are relatively low. Moreover, the volume of housing transactions has held up well as prices have moderated, it said. The OECD said the successful stabilisation of the housing market is probably the result of the Bank of England's policy of raising interest rates early to head off inflation risks. "If a relatively soft landing in the housing market has indeed been achieved, it owes much to the strategy of gradual pre-emptive monetary tightening, in marked contrast to previous episodes when an abrupt correction in house prices was triggered by sharp interest rate rises," it said. The Bank of England raised the repo rate from 3.25 pct in November 2003 to 4.75 pct in August 2004, whereas previous house price crashes were typically preceded by rate increases of 400-500 basis points, it said. But even if instability from the housing market has been avoided this time, reforms are nevertheless needed to dampen future housing market cycles, it said. These should concentrate on measures to increase housing supply, but making the council tax on residential property more proportional to property values and based on more frequent valuations might also dampen house price fluctuations, it said. The OECD also lowered its forecast for UK 2005 GDP growth to 1.7 pct from the 2.4 pct projection in its May economic outlook. It left its 2006 forecast unchanged at 2.4 pct. The 2005 revision reflects slower than expected growth in the first half of the year, and the organisation expects a return to annual growth rates just below the potential rate of around 2.5 pct in the second half. The slowdown in growth which started in mid-2004 was probably welcome, given signs of capacity constraints, the OECD said. It said the cooling of the housing market was the main factor behind the slowdown, because it led to a deceleration in consumer spending. Consumer spending is likely to recover somewhat in the period ahead, but will remain constrained by housing market developments, it said. "The strong link between the housing market and consumer spending suggests that, even without any marked fall in the level of house prices, consumption growth is likely to remain modest," it said. The Bank of England recently said that the correlation between consumption and house prices has weakened since 2000, but the OECD said evidence for this is unconvincing. The organisation said it is less optimistic than the UK government on the outlook for the public deficit, which now stands at just over 3 pct of GDP. "OECD projections suggest that the deficit is likely to remain close to 3 pct of GDP, in contrast with the UK government's projections of a declining deficit," it said. The organisation estimates that net borrowing will be 2.9 pct of GDP in 2005 and 3.0 pct in 2006, whereas the UK government expects the deficit to decline to 2.2 pct of GDP in the 2006-2007 fiscal year. The OECD said the gap between these projections and those of the government are mainly due to differences in projected revenues. The government expects corporate tax revenues to rise by 0.8 pct of GDP by the 2006-2007 tax year, whereas the OECD said it is only projecting corporate tax revenue growth of 0.4 pct. The government also expects income tax revenues to grow by 0.5 pct of GDP, largely as a result of a recovery in bonus payments in the financial sector, while the OECD is forecasting that income tax revenues will rise 0.3 pct. Chancellor of the Exchequer Gordon Brown has eased fiscal policy substantially since 2000, when the UK had a surplus of 3.75 pct of GDP. But the present deficit needs to be seen in the context of relatively low levels of government debt, which stands at 41 pct of GDP on a Maastricht basis, the OECD said. "The low level of debt reduces the urgency with which the deficit needs to be reined back," it said. But it said Brown's "golden rule" of only borrowing for investment over the course of the business cycle is not the best way of measuring the success of his fiscal policy. "Given that the margin by which it will or will not be met during this cycle is likely to be small, using this criterion to judge whether fiscal policy has been a success or failure is inappropriate," it said. The golden rule relies heavily on judgements regarding the timing of the cycle, and the government's recently revised judgement that the current cycle began two years earlier than previously thought will help to meet the rule, it noted.