Carney at 100 Days Confronts Looming Housing Battle: U.K. Credit

Bank of England Governor Mark Carney marked his 100th day in office yesterday with his monetary policy assured and a political battle looming over stability risks from the government’s housing-market plans.

Since starting on July 1, he’s implemented forward guidance on interest rates, loosened liquidity requirements for lenders and put Jane Austen on a bank note, while the economy he oversees has shown increasing signs of strengthening, sending bond yields to a two-year high. Chancellor of the Exchequer George Osborne persuaded him to leave the Bank of Canada to become the first foreigner to run the 319-year-old central bank, giving him a mandate for change.

With guidance keeping monetary policy on hold, Carney’s next big challenge may center on the central bank’s Financial Policy Committee. Deadlocked U.S. budget talks raise the specter of a debt default, and even if that’s avoided, he must still lead a review of the government’s Help to Buy program to boost mortgage lending, making him the arbiter of an initiative that’s been criticized for threatening to stoke a housing bubble.

“The emphasis is going to switch to the FPC,” Keith Wade, chief economist at Schroders Plc in London, which has $388 billion of assets under management, said in an interview. “The challenge for Carney will be if the housing market really takes off, as this could bring him into conflict with the government.”

Stronger Economy

Carney’s guidance is aimed at avoiding a sharp rise in borrowing costs that could choke off the recovery. Under the policy, the BOE plans to keep its key rate at a record-low 0.5 percent until unemployment drops to 7 percent, something the central bank doesn’t see happening until the end of 2016.

Since Carney’s arrival, the pound has strengthened and gilts fallen as the improving economic recovery stokes investor expectations that the BOE will have to raise rates before then.

Sterling has advanced about 6 percent over the past six months, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yield on the 10-year gilt (GUKG10) has risen 26 basis points to 2.7 percent since Carney took over. The extra yield investors demand to hold the debt instead of similar-maturity German bunds has widened to about 90 basis points. It reached 100 basis points last month, the widest spread since June 2010.

Policy Decision

The Monetary Policy Committee will probably leave its key rate unchanged and keep its bond-purchase program on hold this week, according to two Bloomberg News surveys of economists. The decisions will be announced tomorrow. The MPC concludes its monthly meeting today to allow Carney to attend International Monetary Fund meetings in Washington.

After Carney’s first MPC meeting, the BOE issued a statement saying an increase in market interest rates wasn’t justified. A month later Carney, 48, revealed details of a forward-guidance program that linked the benchmark rate to unemployment.

“He’s been a breath of fresh air and has been able to launch a new policy as well as look across all the bank’s different instruments,” said John Gieve, former deputy governor for financial stability at the BOE. “His main priority is to make sure the recovery continues and this isn’t another short-lived blip, while continuing to build up the resilience of the financial system. What will take prominence depends on events.”

Getting the Message

Carney has set aside investor skepticism on BOE forecasts and says consumers and executives are getting the message. He gave four television interviews after introducing the policy on Aug. 7, and traveled outside London for his first major policy speech, addressing business leaders in Nottingham on Aug. 28.

He may need to do more. After his September appearance before Parliament’s Treasury Committee, Chairman Andrew Tyrie still said guidance is a complicated topic to explain.

“The bank is facing some communication issues,” said Petra Geraats, an economics professor at the University of Cambridge who’s written about central bank transparency. “The market reaction was probably not what the bank had intended.”

On a visit to eastern England, Carney said guidance is intended to give certainty about monetary policy to ensure the recovery. He also said the central bank has the tools to ensure the housing market doesn’t enter a “boom and bust phase.”

Those comments followed a range of data showing a pickup in house prices and a decision by the government to begin the second phase of its Help to Buy program three months earlier than planned.

Bubble Risk

The measure, which provides government guarantees to help people buy homes with smaller deposits, has raised concern it will stoke excessive demand and create a bubble. A house-price index rose to the highest in more than a decade, the Royal Institution of Chartered Surveyors said on Oct. 8.

“It’s going to open up the market, we’re already seeing a pickup in viewings and inquiries,” said Kirsty Keeton, manager at Richard Watkinson & Partners real-estate agents in Newark in the English midlands. “It’s going to be controlled. If the market’s going too far, they don’t want to get their fingers burned.”

To meet criticism of risks posed by Help to Buy, the government has tasked the Financial Policy Committee with reviewing the program annually starting next September.

The arrangement, along with a clause in the guidance policy, heightens the importance of the FPC’s quarterly decisions. While guidance includes two caveats related to the central bank’s 2 percent inflation target, there is a third linked to financial stability that enshrines the views of the FPC in monetary-policy decisions. A finding by that panel, also led by Carney, that monetary policy poses a “significant threat” to stability may lead it to argue for tighter policy.

“The precise conditions for financial stability are unfortunately very murky, though the idea behind it is right,” said Cambridge’s Geraats. “The big issue for the bank’s financial stability remit is the housing market, and for monetary policy it’s definitely to communicate more effectively. Carney’s got off to a decent start, but I think the bank can do better.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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