By Ana Nicolaci da Costa and Andy Bruce
LONDON (Reuters) - Britain's housing market is not overheating but interest rates will not remain at record lows indefinitely, Bank of England policymaker David Miles said in an interview on Monday.
Miles, a member of the Bank's Monetary Policy Committee, told Bloomberg Television the amount of slack in Britain's economy means there is no case for tightening monetary policy right now and that "overheating" was not a good word to describe the housing market.
Concerns about the rapid rise of the housing market prompted the Bank of England to announce in November that it would scrap the part of its Funding-for-Lending Scheme that supports mortgage lending.
But the market is still underpinned by low interest rates and the government's Help-to-Buy mortgage guarantee program.
Miles said house prices were not yet rising at an unsustainable pace and that net mortgage lending remained lower than "you might expect in a well-functioning market".
"In terms of a generalized overheating housing market, I don't think that's a good description of where we are," Miles said, adding that national measures of house prices were being distorted by those in the southeast and London.
"If you did get into a situation where the tools that the Financial Policy Committee have seem not up to the job of stopping overheating in the housing market, we would then turn to the blunter instrument of using Bank Rate. We're a long way from that."
The BoE had already said that when the time comes to tighten monetary policy, it is likely to raise interest rates before it sells any assets bought under quantitative easing. It has also said any tightening will be gradual and limited.
Even though Britain's economy grew at its fastest pace since the financial crisis in 2013, the Bank of England has said it is in no hurry to raise interest rates as it tries to make sure the recovery is entrenched before removing stimulus.
HOW MUCH SLACK?
Miles underlined that view on Monday, citing the large degree of spare capacity in the economy that may be greater than the BoE assumed in its latest set of economic forecasts.
He said the amount of slack was "towards the upper end" of the 1.0-1.5 percent of gross domestic product estimated by the Bank in its latest forecasts.
"It's possible that there is more than that," he said, and added that there was a range of views among policymakers on the size of the output gap.
"One shouldn't get the impression that everyone on the committee is absolutely convinced it must be in that interval. That was just the central estimate, if you will, of the committee," he said.
Some fear a rate rise could derail that rebound given it has been led by consumer spending and the housing market - two sectors particularly sensitive to interest rate changes.
It was "important that there is a clear recognition by borrowers and lenders that interest rates will not remain at this level for many years to come," Miles said.
Economists polled by Reuters expect the first interest rate hike to come next year, with a majority pointing to either the second or third quarters.
Miles said investor expectations for a rate hike next year and for the base rate to reach 2 percent by 2016 are "not unreasonable," Bloomberg reported.
He also said he had not applied the role of deputy governor, to be vacated by Charles Bean at the end of June.
(Editing by David Milliken and Tom Heneghan)