Monetary policymakers could regret not hiking rates more aggressively over the past year or so, if extra stimulus is needed after Britain leaves the European Union (EU), the consultant warned in a quarterly economy update.
Even with a Brexit deal the bank is unlikely to raise interest rates again before November 2019, as uncertainty looms over the economy, KPMG said.
The Monetary Policy Committee (MPC) increased interest rates to 0.75% in August – the highest level since 2009 – but reiterated guidance that rates will only rise gradually and to lower levels than seen before the financial crisis.
Interest rates to have little influence on house prices
Returning interest rates to more ‘normal’ levels could help reverse some of the damaging side effects of low rates, including inflated asset prices and rising consumer debt, KPMG said.
However, gradual rises in interest rates will only have limited impact on the housing market, according to the report.
KPMG predicts an average growth rate of house prices of just 1.8% over the next five years, as slower value rises continue.
Markets where affordability is most stretched including London and the South East are forecast to have the lowest level of growth, while Scotland is predicted to rise fastest.
The report said interest rates are likely to play “only a supporting role in terms of what moves the housing market and are currently more relevant to regions where prices are already high”.
Brexit and income growth will have a far larger impact on the UK economy and housing market, it added.
Yael Selfin, chief economist at KPMG UK, said: “With less than a year to go before Brexit, the UK is on the verge of suffering an unprecedented peacetime shock to its business environment.
“The type of arrangements agreed with the EU will have a lasting effect and touch many aspects of the UK, not just the economy.
“In the short term, a number of things play in the UK’s favour.
“The economy remains solid, with low interest rates and inflation gradually returning to target, while wages are recovering modestly, giving more money for households to spend.”