BOE's Cunliffe Sees Case for Action If Credit Growth Accelerates

  • Deputy Governor would want to act `sooner rather than later'
  • Says buy-to-let lending may also pose stability risks

Bank of England Deputy Governor Jon Cunliffe said a rapid growth in lending could increase stability risks and warrant action by the central bank.

Cunliffe highlighted pockets of concern including household debt levels and buy-to-let lending. His comments, at a conference in London, underscore policy makers’ increasing reliance on macroprudential tools, having signaled interest rates are set to stay low for sometime. 

“Given the vulnerability that already exists and the powerful drivers in the U.K., particularly in the housing market, if credit began again to grow faster than GDP, I would want to think about action to manage the financial-stability risks sooner rather than later,” Cunliffe said at the British Property Federation Annual Residential Conference.

Household balance sheets “remain large by historic standards,” Cunliffe said. “The position is sensitive to the unwinding, were it to occur, of some of the forces that pushed rates down over the past 40 years. And of course we remain vulnerable to the resumption of the rates of credit growth, driven by the housing market, seen in the 10 year upswing of the last cycle.”

While factors pushing down real interest rates have probably raised the sustainable level of credit to gross domestic product, it would be “unwise to bet on further upward structural shifts in the level of sustainability,” Cunliffe said.

March Meeting

The FPC, which can deploy tools on everything from curbs on home loans to the cushions banks hold against potential losses, holds its next meeting in March. In December, the committee, chaired by Governor Mark Carney, said the resilience of the financial system had improved and signaled an intention to increase the countercyclical-capital buffer for banks to ward off any stability risks.

Cunliffe said buy-to-let lending in the U.K. also warranted the attention of stability officials. The government is also taking action: from April, buy-to-let properties and second homes in the U.K. will be subject to an additional tax.

“I don’t know how that sector of the market, the buy-to-let sector, will react in terms of market stress,” Cunliffe said. “That could make a crash in house prices if you get into all these balance sheet problems with households.”

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