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 Mark Carney held the key 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. While the MPC didn’t issue a statement with the decision, it dropped a reference to forward guidance that featured in previous months.
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. “All else equal, the more they tighten on the macroprudential side, the less they have to tighten on the conventional monetary policy side.”
This week’s meeting was the first since unemployment fell below the 7 percent level Carney set as a key threshold under his forward-guidance policy, aimed at keeping interest rates low. In the announcement today, the panel removed a reference that its decision was made “in the context of the monetary policy guidance.”
Carney has revamped guidance to focus on slack in the economy. 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.
“It does make it harder to read the Bank of England’s reaction function for now because this is new,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “We’ve got some general idea of what that guidance is trying to tell us, but we haven’t yet seen whether it’s going to change the MPC’s behavior.”
The committee 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.
Separately, Halifax said home values rose in the three months through April and demand continues to outstrip supply. 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.
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.
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.
In Brussels, the European Central Bank’s Governing Council left the main refinancing rate at a record-low 0.25 percent. The outcome was forecast by 56 of 58 economists in a survey.
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.
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. The pound advanced 0.1 percent to $1.6964 today. It rose close to $1.70 two days ago, the highest since August 2009.
At this week’s meeting, the MPC had new 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.”