The “edge is coming off” the U.K. housing market and that may start to affect the wider economy by the end of the year, according to Bank of England Deputy Governor Ben Broadbent.
In his first interview since taking over the running monetary policy, Broadbent said near-term growth indicators are quite strong, though officials predict “some softening” in economic expansion. The scale of Britain’s household debts supports the case for “gradual and limited” rate increases -- but not the argument for leaving borrowing costs at a record-low 0.5 percent, he said.
The comments, in an interview yesterday in his office in London, underscore the challenges policy makers face as they balance the risk of stoking inflation by increasing borrowing costs too late, against the need to secure the economic recovery. The housing market, a focus of their thinking in the past month, has turned out weaker than the BOE forecast, Broadbent said.
“It’s clear that we’ve already had something of a dip even relative to the central expectations that we had six months ago at the beginning of the year,” said Broadbent, 49, who began his new job on July 1. “You can see certainly in quantity and some of the near-term price indicators some of the edge is coming off.”
As deputy governor for monetary policy, Broadbent will sit on the Financial Policy Committee, which is tasked with safeguarding financial stability, as well as the rate-setting Monetary Policy Committee. FPC officials took action last month to prevent people taking on high loan-to-income mortgages they might struggle to afford when interest rates increase.
The BOE steps, along with the introduction of tougher affordability checks in April, may already be having an effect. Lenders approved almost 10 percent fewer mortgages in the second quarter than the first, and Nationwide Building Society said today that house prices grew at the slowest pace since April 2013 this month.
Broadbent suggested that the housing market, together with weaker global growth, may weigh on economic growth.
“Partly because of what’s happening in the housing market, partly because the global economy is arguably a little softer than one might have hoped, to expect some slowdown over the next year, toward the end of the year into next year, isn’t unreasonable,” he said. “You might expect some softening for that reason at least later this year into next year. For the time being, the very near-term indicators of output growth remain quite strong.”
Broadbent said that household debt, which climbed to a record 1.45 trillion pounds ($2.45 trillion) in June, is a reason for the BOE to tighten policy “more gingerly” than in the past, and there is a case to start doing so earlier to ensure the path of interest-rate increases stays gradual.
“Let’s not forget that in 2007 official interest rates were almost 6 percent and the housing market was not frankly a central part, certainly not mortgage losses for banks, a central part of the story on the financial crisis,” he said. “That can be exaggerated.”
Futures contracts are pricing in the first interest-rate increase since 2007 by February, with the possibility of a move this year. The key rate is projected to reach about 2.5 percent by 2018, compared with about 5 percent before the financial crisis.
Broadbent said the first move to tighten policy shouldn’t come as “a huge shock,” and “would be a good thing” as it will mean that “the economy is getting onto secure footing and growing and recovering.”
Market expectations of the pace of rate increases are “clearly more gentle than the forwards in previous hiking cycles,” he said. “That delivers roughly the right outcome for us.”
Policy makers have focused their debate about when to raise interest rates on the amount of slack in the economy. While a faster-than-forecast drop in unemployment shows spare capacity has eroded more quickly than projected, Broadbent said weak wage growth indicates that there may have been more slack than officials initially estimated. The BOE will release a new assessment with its forecasts on Aug. 13.
“It’s quite possible that we started off from a lower level but are eating it up more quickly and ended up more or less where we thought we were,” Broadbent said. “I’m not sure the policy implications are immediate unless you believe this is likely to carry on.”
The quickened pace of employment gains may be partly explained by output being stronger than reported in official data, the deputy governor said.
“One should recognize these revisions take place over time,” he said. “The current numbers say growth over the past year has been three and a bit percent. It’s possible -- I’m not saying it’s the most likely thing -- it’s closer to 4 percent than 3 percent,” he said.
Broadbent joined the BOE as an external member of the MPC in June 2011 from Goldman Sachs Group Inc., where he was senior European economist for 10 years. He’s also been assistant professor of economics at Columbia University and an economic adviser at the Treasury. A graduate of Trinity Hall at Cambridge University, he earned a PhD in economics from Harvard University.
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