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Carney setting out to handle potential housing bubble

August 28th, 2013

During his speech to an audience of business leaders in Nottingham on Wednesday, the Bank of England governor Mark Carney made it starkly clear that he would not baulk from taking steps to prevent further financial disasters if any signs that a lending bubble was imminent within the mortgage market. Carney suggested that he would not pull back from such steps as enforcing lending restrictions, and also declared that he would look for lenders to increase their capital requirements when forwarding an advance.

In the brief time that Carney has come into office as the Bank of England governor, he has not stood off from confrontation with economists and has made some clear statements of intent. Over the past month, much has been made by market analysts of the potential for a sharp and sudden rise to interest rates for lending. Carney has been quick to stave off further fears, instead confirming that he personally sees interest rises to not be a requirement until unemployment rates drop to 7 per cent or lower. On that note, the expectation leans towards no rates rises developing until at least late 2015 to early 2016.

Carney’s ability to enforce tighter control on lending activity is a measure that was not available to the Bank of England until recently. Pre-credit crunch, the central Bank’s Financial Policy Committee was only in a position to notify the Government and the public of impending risks to the financial structure. But since the regulatory restructuring of the Financial Services Authority into the Financial Conduct Authority, the FPC has seen their powers broaden, with the authority to implement drastic changes to policy being the most prominent of these newly appointed abilities.

As Carney laid out his plans to the congregated business leaders in Nottingham, he made it clear that he would be implementing changes to the banking system, only if he felt that due care and restraint was not being utilised by lenders. Carney said: “The Bank of England is now in a position, for example, to supervise lending to specific sectors more intensively, to make recommendations to banks and building societies to restrict the terms on which new credit is provided, or even to raise capital requirements on mortgages or other types of lending.

“Having these tools in our tool kit – and if necessary using them – will help us keep interest rates low to secure the recovery without creating risks that make the recovery ultimately unsustainable. We are now fully prepared to deploy them if that were needed.”

Carney remarked that even though mortgage approvals have continued to rise through the first two quarters of 2013, “Mortgage approvals are currently running at only a little more than half of pre-crisis levels and transactions are at a little more than two-thirds… Nevertheless, the Bank of England is acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely.”

While Carney’s bold stance may encourage confidence that the markets will not see a return to the low-point of 2008, many economists have continued to pour scorn on the Bank of England’s emboldened stance. Government bond yields and the pound spiked after the delivery of Carney’s speech, and appear to show no sign of reducing, which many market experts suggest is a sign that confidence in is still low.

Economists are also continuing to suggest that these are sure signs that rates will rise far sooner than the BOE would like to think. Chief UK economist for Capital Economics, Vicky Redwood, stated: “Carney gave an unambiguously dovish maiden speech but he still seems to be fighting a losing battle against the financial markets…the Governor’s words have fallen on deaf ears.”

Article By: Jon Shields, Media Executive at Contractor Mortgages Made Easy

Media Contact: Raman Kaur, Public Relations Manager

Tel: 01489 555 080

Email: media@contractormortgagesuk.com

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