The Bank of England will need to consider raising interest rates to rein in Britain’s housing market if controls designed to curb risky lending prove insufficient to see off the threat to financial stability, the International Monetary Fund (IMF) has said.
While suggesting that Threadneedle Street keep rates at 0.5% for now, the Washington-based IMF made it clear it was carefully watching the UK for signs of a new property bubble developing.
It expressed some reservations about whether limits on mortgage lending announced by the Bank in recent months would be enough to prevent another damaging property bubble.
But it warned that the Bank would have to be cautious in deploying its biggest weapon because of the possibility of damage to the wider economy.
Last week, the Bank’s financial policy committee said it wanted statutory powers to compel lenders to limit the size of a home loan both in relation to the value of the property and the income of the borrower.
But in its half-yearly world economic outlook (WEO), the IMF said buoyant housing markets were posing policy challenges in a number of western countries, including the UK.
“House prices, however, have increased by 10% across the country – in London, more than double that – and household debt, at 140% of gross disposable income, remains high,” it said.
The IMF noted that the Bank had started to use so-called macro-prudential tools, specific controls designed to cool down the housing market without collateral damage on the rest of the economy.
It added: “Tighter monetary conditions could also be considered if macro-prudential tools prove ineffective at addressing financial stability concerns, but careful consideration would need to be given to the trade-off between damage to the real economy and the ultimate costs of financial vulnerabilities.”
With only two members of the Bank’s nine-strong monetary policy committee voting for a rate rise, the IMF said it did not expect to see the first increase in official borrowing costs until the “first half of 2015”.
It said it expected the process to be smooth, without large or protracted disturbances in financial markets and sharp upward movements in long-term interest rates.
“In the UK, activity has rebounded and become more balanced, driven by both consumption and business investment, thanks to improving credit and financial market conditions and healthy corporate balance sheets.
Growth is projected to average 3.2% in 2014 and 2.7% in 2015, about a quarter of a percentage point stronger than forecast in the April 2014 WEO,” the IMF said. Britain is expected to be the second fastest-growing economy in western Europe after Ireland this year, according to the IMF.
But despite a rapid fall in unemployment – forecast to tumble to 6.3%, the IMF said there was still slack in the labour market. The Bank has been surprised that wage pressures in the UK have remained weak despite the drop in the jobless total.
The IMF said the lack of earnings growth and an inflation rate below the government’s 2% target meant there was no immediate pressure on the MPC to act.
“In the UK, given weak price and wage pressures, monetary policy should stay accommodative for now, but it may need to be tightened quickly if inflation rises.”
theguardian.com
While suggesting that Threadneedle Street keep rates at 0.5% for now, the Washington-based IMF made it clear it was carefully watching the UK for signs of a new property bubble developing.
It expressed some reservations about whether limits on mortgage lending announced by the Bank in recent months would be enough to prevent another damaging property bubble.
But it warned that the Bank would have to be cautious in deploying its biggest weapon because of the possibility of damage to the wider economy.
Last week, the Bank’s financial policy committee said it wanted statutory powers to compel lenders to limit the size of a home loan both in relation to the value of the property and the income of the borrower.
But in its half-yearly world economic outlook (WEO), the IMF said buoyant housing markets were posing policy challenges in a number of western countries, including the UK.
“House prices, however, have increased by 10% across the country – in London, more than double that – and household debt, at 140% of gross disposable income, remains high,” it said.
The IMF noted that the Bank had started to use so-called macro-prudential tools, specific controls designed to cool down the housing market without collateral damage on the rest of the economy.
It added: “Tighter monetary conditions could also be considered if macro-prudential tools prove ineffective at addressing financial stability concerns, but careful consideration would need to be given to the trade-off between damage to the real economy and the ultimate costs of financial vulnerabilities.”
With only two members of the Bank’s nine-strong monetary policy committee voting for a rate rise, the IMF said it did not expect to see the first increase in official borrowing costs until the “first half of 2015”.
It said it expected the process to be smooth, without large or protracted disturbances in financial markets and sharp upward movements in long-term interest rates.
“In the UK, activity has rebounded and become more balanced, driven by both consumption and business investment, thanks to improving credit and financial market conditions and healthy corporate balance sheets.
Growth is projected to average 3.2% in 2014 and 2.7% in 2015, about a quarter of a percentage point stronger than forecast in the April 2014 WEO,” the IMF said. Britain is expected to be the second fastest-growing economy in western Europe after Ireland this year, according to the IMF.
But despite a rapid fall in unemployment – forecast to tumble to 6.3%, the IMF said there was still slack in the labour market. The Bank has been surprised that wage pressures in the UK have remained weak despite the drop in the jobless total.
The IMF said the lack of earnings growth and an inflation rate below the government’s 2% target meant there was no immediate pressure on the MPC to act.
“In the UK, given weak price and wage pressures, monetary policy should stay accommodative for now, but it may need to be tightened quickly if inflation rises.”
theguardian.com
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