Carney: home loans may be curbed

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Mark Carney

The Bank of England will intervene to restrict mortgage lending if surging property prices create an unsustainable housing bubble, new governor Mark Carney has warned.

Mr Carney said policymakers were closely monitoring Britain's resurgent property market, which has seen home loan approvals rise by 20% and prices lift 5% in the last year amid government measures to revive transactions.


He made the remarks during his first public speech as governor in which he also robustly defended his flagship "forward guidance" policy, casting aside City doubts and hinting that it could be backed up with more stimulus.

The Bank's commitment to low interest rates until unemployment falls to 7% is designed to ease lending conditions and help nurse the economy back to health, but caveats in the policy have left markets sceptical.
Mr Carney suggested he could take further action should this hamper a recovery. But he faces the additional challenge of trying to prevent the low rates causing a dangerous credit binge.

He said the Bank was "acutely aware of the risk of unsustainable credit and house price growth" and said it would be supervising lending to specific sectors more intensively.

Mr Carney said lenders could be asked to restrict borrowing terms or even be forced to hold more cash on their balance sheets to dampen down an over-heated property market.

He told reporters that "intensive supervision of activity in that area" was a policy that he was bringing over from his previous role as head of Canada's central bank.

Meanwhile, Mr Carney sought to shore up his forward guidance policy after it led markets to bring forward their expectations of when interest rates would rise - the opposite of the effect he would have hoped for.

It has caused traders to push up yields on government bonds - rates which ultimately have an effect on the price of borrowing for individuals and businesses.

But an aide said the governor was "not losing any sleep" over the market reaction and Mr Carney said to focus on the City's view of the policy was "missing the point".

He said that interest rates on 70% of loans to households and 50% of those to businesses were linked to the Bank rate rather than the market.

He added that should a tightening in market conditions threaten the conditions facing the real economy, the Bank would "consider carefully whether, and how best, to stimulate the recovery further".

He stressed that forward guidance did not rule out more stimulus for the economy, which would be most likely to come in the form of adding to the Bank's £375 billion money printing quantitative easing policy.

Under the guidance, current forecasts suggest that joblessness will not have reached the level needed for a rate rise until 2016, but markets have priced in an increase in early 2015.

Mr Carney's speech to business leaders in Nottingham was partly designed to try to go over the heads of investors in the square mile and persuade businesses that low interest rates meant that the time was right to invest.

He stressed again that the Monetary Policy Committee did not intend to even consider raising rates until after unemployment fell and that even then they would not rise until the conditions were right.

Mr Carney added that an increase in productivity levels of the labour force could result in it taking even longer than three years for unemployment to reach the 7% threshold - or a fall of 750,000.

He pointed out that amid a tightening in the public sector this would necessitate a million more private sector jobs to be created.

The governor also announced a significant measure in his speech to try to ease lending by eight major banks and building societies, by reducing the total amount of liquid assets they must together hold by £90 billion.

The cut is dependent on the banks achieving targets to increase the level of capital they hold to protect against future financial shocks.

Critics including Business Secretary Vince Cable have criticised the targets and claimed they deter lending, but they were defended by Mr Carney, who argued healthier bank balance sheets ultimately lift prosperity.

The governor hailed the achievements so far in repairing the banking system, although he stressed there was no "mission accomplished banner saying the banking system's fixed".

Nida Ali, economic adviser to the EY ITEM Club, welcomed the loosening of asset restrictions and the attempt to communicate directly with business as a "step in the right direction" to boost the real economy.

But others remained sceptical, with Investec economist Victoria Clarke saying the Bank's jobs forecast looked pessimistic and that a "muted" reaction from the stock market to Mr Carney's speech suggested many shared the view.

© 2013 Press Association