Carney Keeps Rates on Hold as BOE Seeks House-Price Tools

Photographer: Simon Dawson/Bloomberg

Mark Carney, governor of the Bank of England. Close

Mark Carney, governor of the Bank of England.

Photographer: Simon Dawson/Bloomberg

Mark Carney, governor of the Bank of England.

The Bank of England kept borrowing costs at a record low today as policy makers look to untested tools to control Britain’s surging housing market.

The Monetary Policy Committee led by Governor Mark Carney voted to leave the benchmark interest rate at 0.5 percent, reinforcing his view that the panel is the “last line of defense” against property risks. That will intensify the onus on the BOE’s Financial Policy Committee to devise a plan of action for real estate. Home values are surging about 10 percent a year.

The Organization for Economic Cooperation and Development warned this week of overheating in the property market and BOE Deputy Governor Jon Cunliffe said it’s “dangerous” to ignore its momentum. Officials say the debate over borrowing costs centers on the amount of spare capacity in the economy, leading investors to bet the central bank will refrain from raising the key rate until 2015.

“We think the major action in the coming months is going to be on the FPC,” Kevin Daly, an economist at Goldman Sachs Group Inc. in London, said in a Bloomberg Television interview today. “We do think there’s a high chance that they will tighten macroprudential policy in June. All else equal, the more they tighten on the macroprudential side, the less they have to tighten on the conventional monetary policy side.”

The MPC met days after the OECD said that house prices are “buoyant and significantly exceed long-term averages relative to rents and household incomes.” The Royal Institution of Chartered Surveyors said today in its monthly house-price report that values are on a “firmly upward trend” that will probably be sustained over the next year.

‘Gathering Pace’

Separately, Halifax said U.K. home values rose in the three months through April and demand for properties continues to outstrip supply. “Housing demand continues to be supported by an economic recovery that is gathering pace,” the mortgage lender said.

The cost of a two-year fixed-rate mortgage covering 75 percent of the value of a home dipped to 2.37 percent in March, the lowest rate since at least 1994, BOE data show.

“It would be dangerous to ignore the momentum,” Cunliffe, who sits on both the MPC and FPC, said on May 1. The FPC “will need to be both vigilant and ready to act.”

The 10-member FPC holds its next meeting on June 17 and will publish its recommendations the following week. After its March meeting, the committee said a tool to toughen affordability tests of borrowers will be available as soon as June. It’s already withdrawn mortgage incentives in the credit-boosting Funding for Lending Scheme and said it will take further “proportionate” action if needed.

Overheating Risk

For the central bank, action may mean addressing capital requirements or maximum loan-to-value ratios on mortgages, according to the OECD. For the government, that could mean curtailing its Help to Buy program, set up to assist people with small down payments.

That may not be enough. The OECD has warned there’s a risk that microprudential and macroprudential policies are “ineffective in containing the housing market, resulting in overheating.” The BOE has said that macroprudential policy is “relatively untested” in most developed countries. Chancellor of the Exchequer George Osborne said this week that the government will be “vigilant” on housing.

Slowing Inflation

While Britain’s recovery has gained traction this year, cooling inflation is giving the MPC scope to keep rates unchanged. Consumer-price growth slowed to 1.6 percent in March, the least since 2009 and below the BOE’s 2 percent target.

All 51 economists in a Bloomberg News survey forecast the key rate would stay at 0.5 percent today. The MPC also kept its bond-buying plan at 375 billion pounds ($636 billion), as unanimously forecast in a separate survey. Carney said in March officials should only begin to unwind the program known as quantitative easing after “several” interest-rate increases.

Derivatives known as Sonia contracts signal the bank will raise rates a quarter point by April, with the benchmark reaching 2 percent by the end of 2016.

Carney has revamped his forward-guidance policy to focus on slack in the economy after unemployment fell below the 7 percent he set as a key threshold. Minutes of this week’s MPC meeting, to be published on May 21, will reveal any divisions among policy makers on the level of slack or the inflation outlook. The record may also show a discussion of the pound, which rose close to $1.70 two days ago, the highest since August 2009.

The currency was at $1.6970 as of 11:51 a.m. London time, up 0.1 percent from yesterday. The 10-year gilt yield was at 2.67 percent, 119 basis points more than equivalent German debt.

At this week’s meeting, the MPC had new economic projections prepared for the quarterly Inflation Report on May 14. In February, it predicted growth of 3.4 percent for this year.

“Inflation means there’s not a huge amount of pressure to hike rates,” said Alan Clarke, an economist at Scotiabank in London. “The forecasts will be similar to February, and though the data will be nudging them in a hawkish direction we won’t see a dissenting vote for a rate increase this soon.”

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editors responsible for this story: Craig Stirling at Andrew Atkinson, Fergal O’Brien

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