Carney Says Housing Remains Biggest Medium-Term Risk to U.K.Jennifer Ryan and Scott Hamilton
The British housing market remains a threat to the country’s economic recovery even after officials took action last year to tame risky lending, Bank of England Governor Mark Carney said.
“The legacy of high indebtedness and structural imbalances in the U.K. economy means that there are risks that, if left unchecked, could undermine the durability of the expansion,” Carney told a House of Lords committee on Tuesday. “The biggest medium-term risks relate to the housing market.”
While real estate will continue to be monitored by the Financial Policy Committee, Carney said the Monetary Policy Committee is staying focused on returning inflation to the 2 percent goal. He noted that consumer prices will barely increase for much of the year because of weak commodity costs and slack remaining in the economy.
The MPC left the key interest rate at 0.5 percent last week, as officials monitored the impact of record-low inflation on expectations for prices. Carney has already had to write one letter to the Treasury explaining why inflation, now at 0.3 percent, has strayed so far from the bank’s target, and he anticipates sending a few more letters this year.
Carney’s wide-ranging comments to the Lords’ Economic Affairs Committee may be among his last in public before government officials undergo a purdah period before the May 7 general election. Among risks he pointed to were those stemming from a long period of low interest rates, and misconduct in financial markets.
“Time and again, this country has seen how quickly responsible can turn to reckless, creating imbalances that ultimately destabilize the economy,” he said.
Carney’s mention of housing-market risks follows action the BOE took last year to cool real estate. In June, the Financial Policy Committee said lenders must limit the proportion of mortgages at 4.5 times income to no more than 15 percent of their new home loans. It also said banks must decline loans to borrowers who fail a new stress test for interest-rate increases.
Asked about the tools available to the BOE to tackle a prolonged period of below-target inflation, Carney said he preferred cutting interest rates to quantitative easing. Bond purchases are “more effective in markets that are dislocated or under stress than in more normal times,” he said.
Asked about the inflation target, the governor said there may be a situation where it becomes necessary to change the goal, though he wasn’t advocating such a move.
“I’m in the pure hypothetical now, but if it were identified that we were in a period of a prolonged supply shock which had positive productivity implications,” there “might be a case for adjusting the level of the inflation target,” he said. “But that is a sober adjustment made by parliament, by government, over time through public debate as opposed to a reaction to temporary deviations in inflation.”
While Carney says low price growth in the U.K is caused by temporary factors and officials are prepared to look through them, European Central Bank President Mario Draghi is starting his first round of QE to stop deflation taking hold in the euro area. The ECB will buy 1.1 trillion euros ($1.2 trillion) of debt, and Carney said that may add 1 percentage point to the region’s gross domestic product over the next three years.
“That’s good news for us as exporters,” Carney said. “Greatly reducing that tail risk from Europe in the near term is a benefit.”