The EU's fiscal rules are based on the Stability and Growth Pact. They are arbitrary, inflexible, inappropriate and based on an incorrect formulation of the problem. The correct criterion is that sovereign debt should be sustainable: i.e. governments should be able to service and redeem their debt. This permits much more flexibility than the EU's rules and covers all situations for countries whether in a monetary union, having a fixed or a floating exchange rate. The sustainability of the EU's rules is based on a deficit of 3% of GDP, a debt GDP ratio of 60% and inflation of 5%. None of these is either necessary or sufficient to achieve debt sustainability. Their only possible justification is that they are simple. To implement a debt sustainability rule governments should publish detailed plans which can be assessed for their plausibility.

The Bank's mandate should not be changed. It should still use interest rates to target inflation on the principle that the number of targets requires at least as many instruments. Adding an extra target - asset prices - would not therefore be consistent with this. However, there is no reason why the Bank should not be conscious of the effect on financial asset prices of its other instrument - quantitative easing. A further problem with targeting house prices is that it is a real asset and is affected by supply - which the Bank has little control over - as well as demand, which interest rates would affect. I would not be in favour of the Bank using interest rates to control housing demand as this is likely to be inconsistent with its inflation target.