The governor took steps yesterday to head off a potential housing bubble by diluting a credit-boosting program, two weeks after raising growth forecasts and signaling interest rates might increase sooner than previously projected. Underpinning the need for the move were data today showing house values at the highest level in more than five years, and banks approving the most mortgages since 2008.
“It’s a sign the Bank of England has confidence in the economy,” said Jeremy Hale, head of macro strategy at Citigroup Inc. in London. “The market has taken this as a sign that the period of super-low rates is coming to an end. This probably brings the U.K. into the tightening frame earlier than other big developed economies.”
The pound rose to the strongest level in more than two years as investors bet the changes to the Funding for Lending Scheme nudge the BOE toward an exit from extraordinary stimulus as the economy grows at the fastest pace in three years. The direction contrasts with that of the European Central Bank, which cut interest rates last month and is reviewing whether it needs to do more to keep credit flowing.
Britain’s 0.8 percent growth in the third quarter was the quickest among the Group of Seven nations, according to the Organization for Economic Cooperation and Development.
“The turnaround in the U.K.’s economic performance has been one of the most notable economic surprise stories of 2013,” Goldman Sachs Group Inc. economist Kevin Daly wrote today in a note to clients. He he revised up his 2014 growth forecast to 2.7 percent from 2.4 percent.
The brighter outlook for the economy and speculation that interest rates may be increased as early as the end of 2014 have helped push the pound up almost 8 percent against the dollar in the past six months. Sterling strengthened 0.2 percent to $1.6371 at 4:04 p.m. London time, after reaching $1.6384, the highest level since August 2011.
The BOE’s Monetary Policy Committee has linked its benchmark rate to unemployment and said it won’t start considering an increase until joblessness falls to 7 percent as long as inflation remains anchored and financial stability isn’t threatened. Based on BOE forecasts, the 7 percent threshold may be reached as early as the fourth quarter of 2014.
“It was only seven months ago when there were concerns about a triple-dip recession and people were talking about more stimulus,” said Nick Bate, an economist at Bank of America Merrill Lynch in London and a former U.K. Treasury official.
“Now, seven months later, the discussion is all about housing booms, so extrapolate that forward another year, then you will have had a pretty long run of decent growth,” he said. “The environment will be very different and the focus will be on when it’s time to start raising rates.”
The BOE last increased borrowing costs in July 2007, before global markets seized up. Five months later, officials cut the key rate by a quarter point to 5.5 percent.
It reduced benchmark borrowing costs to a record-low 0.5 percent and added government bond purchases and credit-boosting programs to nurture the recovery. As recently as June, three members of the MPC voted to expand bond buying.
Carney’s measures coincide with evidence that demand and prices are rising. Lenders granted 67,701 mortgages in October, the most since February 2008, the BOE said today. Home values increased 0.6 percent in November, Nationwide Building Society said. They climbed 6.5 percent from a year earlier, the fastest pace since July 2010.
For economists at HSBC Holdings Plc (HSBA) and ING Bank NV, the measures may allow the BOE to keep interest rates lower for longer. That’s because the action by its Financial Policy Committee shows it can use macro-prudential tools to target specific problems in the economy.
“Today’s report is not particularly hawkish,” said Simon Wells, an economist at HSBC in London. “The BOE wants to use new macro-prudential tools to calm the housing market, rather than deploy the blunt instrument of higher interest rates.”
Carney has said he won’t consider raising rates until there is sustainable economic growth. He said yesterday the housing curbs will help him keep that pledge.
The measures “will contribute to a constructive evolution of the housing market,” he said. “By reinforcing financial stability, they further reinforce the MPC’s ability to provide exceptional monetary stimulus to the entire U.K. economy for as long as it deems appropriate.”
Housing has also been discussed by BOE’s Court of Directors. Carney emphasized the need for “synergies” between the MPC, the Financial Policy Committee and the Prudential Regulation Authority board, according to the minutes of the Court’s meeting on Sept. 25, published yesterday.
It cited the housing market, “which had received much attention and where all three policy boards were engaged,” the minutes said.
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