London Letter: UK interest rates are heading up - but by how much? Misreporting of the Council for Mortgage lenders' "call for a doubling of interest rates" attracted "Mortgage Shocker" headlines earlier this week, with the trade body seemingly calling on the Bank of England to push interest rates up to near double digits, writes Chris Johns.

According to those reports, building societies and banks think the only way property prices can be stopped from rising is a monetary tightening far exceeding anything being forecast.

Such was the storm caused by this suggestion that interest rates might have to hit something close to 10 per cent, that the council was forced to issue a clarification.

Apparently, what it meant to say was that if the Bank of England were to change its inflation objective to one which exclusively targeted house prices, interest rates would have to rise to heady levels to stop a market now rising at something like an annual 20 per cent rate.

The bankers do not suggest this will actually happen - their formal forecast is for a moderate rise in rates.

This backtracking didn't cut a lot of ice with many people, as it is abundantly clear that 10 per cent interest rates wouldn't just stop house prices from rising. Much more likely, a horrendous crash would ensue, such is the indebtedness of the average British household.

Like turkeys voting for Christmas, the bankers seem to be speculating about - if not actually advocating - a meltdown in the property market.

A more sober analysis would have argued that such has been the recent acceleration of house prices, the Bank of England should step up the pace a little and, perhaps, forget about gradualism. Market expectations for base rates of around 5 per cent by the end of the year should, under this analysis, be massaged up a notch.

Perhaps that is what they meant to say but something certainly got scrambled along the way.

Indeed, the Bank of England seems to agree. At its last meeting, the only discussion appears to have been whether the policy of raising rates in steps of 0.25 of a percentage point should be abandoned. One member wanted a 0.5 of a point rise.

For as long as the economy keeps bounding along, we should expect to see more of this. But the central bank must now be concerned that the wider economy might slow down - think oil price effects - while house price inflation keeps bounding ahead.

In such circumstances, it would be very tough to move to an aggressive policy stance - its remit is not exclusively focused on property prices.

The housing market is complicating the Bank of England's task in a big way. It wants to get property price inflation under control but only has a very blunt instrument for achieving this. Interest rate rises can kill as well as cure.

One problem the bank faces is that the forces driving real estate prices are changing all the time and are poorly understood. Russian money is pouring into central London and not just into Chelsea football club. Big trophy properties are being snapped up before they even come on the market. Yet the bottom has fallen out of the market for standard two-bedroom flats.

For many years, the most expensive place to rent an office was the City but now the West End commands higher prices, with voracious government appetite for space partly to blame. City commercial rents have been under pressure from the bursting of the stock market bubble and the drift of big banks to Canary Wharf.

One myth about rising UK property prices is the belief that the boom is being caused by buy-to-let. Disillusionment with equities has certainly prompted many people to move into this market but not in the way that is commonly supposed. There are, in fact, only around 400,000 mortgages secured on buy-to-let properties and only 2 per cent of the working population own more than one home. This level of ownership is nowhere near enough to be solely responsible for the continuing rise in prices.

Prices are now rising more vigorously outside London, although with many regional variations. This spreading out of the boom is another factor that will prompt the Bank of England to step up the pace of rate rises. But the more aggressive it becomes, the more likely it is that sterling will resume its rise against the euro and the dollar.

The Monetary Policy Committee has rightly received many plaudits for its policy successes since its birth seven years ago. It looks like it is about to face its severest test.