Any action on the U.K. housing market by the Financial Policy Committee should be viewed as preventing future problems, Bank of England Deputy Governor Charlie Bean said.
“I see what the FPC could do as insurance against problems that might build, rather than that we have already let the genie out of the bottle,” Bean told the Sunday Times in an interview published today. Bean, who oversees monetary policy at the central bank and will retire on June 30, is a member of the FPC which next meets on June 17.
BOE Governor Mark Carney said June 12 that rising U.K. mortgage debt may undermine Britain’s recovery, and that the FPC can use its macroprudential tools to defend financial stability from risks posed by a surging housing market. He said those tools will enable the bank to leave the key interest rate at a record low 0.5 percent to cement the recovery.
Bean told the Sunday Times a higher interest rate “would not have made much difference” in addressing the build-up of problems from sources such as the U.S. housing market, cumulating in the financial crisis.
“The real moral of the story is that you need to use other tools to address financial imbalances, and that those tools need to be your first line of defense,” he said.
Average U.K. house prices rose 3.9 percent in May to a six-year high of 184,464 pounds ($313,000), Lloyds Banking Group Plc’s Halifax division said June 5. Still, there are divisions across the country, and government data show annual price growth in London was 17 percent in March compared with 8 percent for the whole country.
The BOE has faced pressure to act on housing from groups such as the Organization for Economic Cooperation and Development. Chancellor of the Exchequer George Osborne last week gave the FPC new powers to curb mortgage lending.
Bean’s comments come as officials weigh what policy is appropriate to deal with a recovery that’s gained traction. Carney said last week interest rates could rise sooner than investors expect.
After his remarks, investors shifted their view, pricing in a rate increase by January compared with previous bets for May, Sonia contracts showed. The Monetary Policy Committee cut the key rate to 0.5 percent in March 2009, and has left it there since.
An interest-rate increase “will be a symbolic step, because it will be an indication that we are on the road back to normality,” said Bean, whose Sunday Times comments were confirmed by a Bank of England spokeswoman. “I would welcome us getting on to the path of normalization, as a demonstration that the economy is healing,” he added.
U.K. gross domestic product expanded 0.8 percent in the first quarter and is on track to be the fastest-growing among Group of Seven nations this year. While Osborne’s Conservative Party is gaining ground it still hasn’t pulled ahead of the opposition Labour Party in voter opinion polls.
Labour’s lead over the Tories narrowed 2 points in a ComRes poll conducted between June 11 and 13 for the Independent on Sunday, the smallest margin in more than two years. Labour stood at 34 percent, up one point from May, while the Conservatives rose 3 points to 32 percent. A margin of error wasn’t given.
Bean said he was “optimistic” on the outlook for the U.K. and that the economy was showing “better balance” toward investment.
“This is a recovery that has legs,” he said. “There are still risks but there are plenty of reasons to be cheerful.”