The Bank of England should stand ready to tighten its curbs on mortgages and may need to consider raising interest rates if that fails to rein in housing-market risks, the International Monetary Fund said.
Britain’s housing market, while not yet showing the typical signs of a bubble, may pose a risk to financial stability, the Washington-based fund warned in a report today following its June Article IV consultation on the U.K. While “the overall policy mix was appropriate,” rapid adjustment might be required. An increase in inflation would also warrant a change in monetary policy, the IMF said.
“Accommodative monetary policy is appropriate for now, given weak inflation pressures, but policy might need to be adjusted quickly if inflation takes off,” the IMF said. “Interest-rate increases may also need to be considered if macroprudential tools are insufficient to deal with financial-stability risks from the housing market.”
Bank of England Governor Mark Carney introduced new curbs on mortgages last month, while rules came into force in April requiring tougher mortgage-affordability tests as house prices have surged, particularly in London. The central bank has said macroprudential tools remain its first line of defense against risks in the housing market.
The IMF, which raised its U.K. growth forecast last week for the fourth time in nine months, also said today “the economy has rebounded strongly and prospects are promising,” with headwinds from credit conditions and confidence having eased. It noted that the pound is “moderately overvalued.”
A “steady increase in high-loan-to-income mortgages implies that households are gradually becoming more vulnerable to falls in income and interest-rate shocks,” the IMF said. Officials “should stand ready to tighten these limits should current settings prove ineffective in reining in those risks,” it said.
The IMF also said the U.K. must tackle a lack of supply of new homes to find a lasting solution to its housing-market risks.
Recent reports suggest measures to cool the market may be starting to work. London house prices stagnated in July, the first month with no growth since December 2012, as demand plunged and properties took longer to sell, Hometrack Ltd. said last week. A survey by Halifax today showed the balance of people saying the next 12 months are a good time to buy a home slumped to 5 percentage points in the second quarter from 34 in the previous three months.
There are “some recent signs of deceleration in house prices, but these might only reflect a temporary slowdown as lenders learn new loan-approval procedures” the IMF said, noting that “historical experience of the U.K.’s relatively large house-price swings suggests caution.”
IMF official Philip Gerson told reporters on a conference call today that the fund doesn’t have a specific forecast for when the central bank might begin tightening policy.
The fund did say in its report that the BOE could take steps to minimize uncertainty around future policy by publishing the Monetary Policy Committee’s preferred path for interest rates, instead of one conditioned on market expectations.
That could remove “a step markets have to take to deduce the MPC’s thinking,” the IMF said. “Uncertainty around the interest-rate path could be indicated by a fan chart, just as with the current GDP and inflation forecasts, to make it clear that the path is simply a projection rather than a promise.”