The Bank of England Governor, Sir Edward George, has issued a stark warning that the central bank will have "no option" but to raise interest rates if domestic demand growth does not slow.
Speaking to a parliamentary committee on Thursday, George said: "If it doesn't happen that domestic demand slows, and the external situation picks up, that's when it would generate inflationary pressure.
"At some point we will have to moderate the rate of growth of domestic demand."
The BoE's Monetary Policy Committee last year slashed interest rates to a 38-year low of 4.0 pe rcent in a bid to head off the effects of a global economic slowdown.
But with consumer spending booming and industrial output recovering in line with the world economy, economists expect the MPC to begin raising rates, possibly as soon as next month.
Bank deputy governor David Clementi repeated his warning that house price inflation, currently running at over 18 percent annually, was "unsustainable".
He urged both buyers and lenders to exercise a degree of caution, warning that the longer the boom went on, the sharper the correction in house prices was likely to be.
George said the MPC could not seek to control house prices, as its target was underlying inflation, or RPIX.
"We absolutely take account of house prices. We do not believe the current rate of house price growth is sustainable but it is a factor driving consumer spending," he said.
"But you cannot say we don't care about house prices, but we are interested in the total picture."
George also said the MPC was surprised by official economic growth data which showed the economy apparently ground to a halt in the first quarter.