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Carney hints at rate rise as Bank gets new lending power
Bank of England governor Mark Carney says interest rates may have to rise ‘sooner than expected’ as he gets new powers to limit mortgage lending.
The chancellor George Osborne has given the Bank of England new powers to limit mortgage lending while its governor Mark Carney (pictured) has set the scene for a ‘sooner than expected’ interest rate rise.
In their annual addresses at the Mansion House in the City and Osborne and Carney spoke of the need to respond to the rapid economic recovery and take measures to prevent a damaging housing bubble. They both announced a review of the currency, commodities and bond markets in response to allegations that key trades are being fixed.
But the main surprise of the evening was Carney's warning that interest rates might have to rise 'sooner than markets currently expect' to keep the economy on an even keel.
Carney said the UK was already in a ‘vulnerable position’ with household debt at 140% of disposable income.
However, he added: ‘Raising interest rates today would be the wrong response to this potential vulnerability tomorrow.'
He also stressed that a rise this year would not mean a change to the Bank's policy of rising rates slowly once they started to move. Hiking the cost of borrowing too swiftly could be very damaging, he warned.
‘But to be clear the [Bank's] monetary policy committee has no pre-set course, the ultimate decision would be driven by the data.'
Carney explained that house price inflation of 10% in the past year was not the Bank's real concern. Its focus was risky lending.
‘There are some signs that underwriting standards are becoming more lax, with the proportion of new mortgages at high loan-to-income ratios now at an all-time high. The increase in house prices in the past year means we can expect the proportion of high loan-to-income mortgages to grow further in the coming year even if the housing market begins to slow. This is concerning because a durable expansion requires mortgages to be serviceable over their lifetime not just when interest rates are at record lows.’
Earlier Osborne said the Bank's new financial policy committee would be given additional legal powers to curb mortgage lending, by limiting the proportion of high loan to income mortgages each bank can lend or ban lending above a certain level. It already has the power to rein in the government's controversial Help to Buy scheme which critics say has stoked the flames of an overheating property market.
While he reiterated that there was ‘no immediate cause for alarm’, Osborne admitted there are problems ‘on the horizon’ that could impact homeowners.
Although the average loan-to-value ratio for new lending is below normal, the average loan-to-income ratio has risen to new highs. This is driven by house price inflation far outstripping wage growth meaning people have to borrow far higher multiples of their salary in order to afford a home. This means when interest rates rise already over-stretched borrowers will have to find more money to pay their loans.
Avoid a bubble
‘I am giving the Bank new powers over mortgages including over the size of mortgage loans as a share of family incomes or the value of the house,’ he sad. ‘In other words, if the Bank thinks some borrowers are being offered excessive amounts of debt, they can limit the proportion of high loan-to-income mortgages each bank can lend, or even ban all new lending above a specific loan-to value ratio.
‘And if they really think a dangerous housing bubble is developing, they will be able to impose similar caps on loans-to-value ratios.’
RBS and Lloyds have already put a cap on lending on properties with a value of over £500,000, only allow borrowers to take out four-times their income as a mortgage.
The powers will be legislated for and in place by the end of the parliament next year, said Osborne.
Help to Buy working
Any cap on loan-to-value ratios will hit the Help to Buy scheme, which has seen the government offer equity loans and mortgage guarantees for those taking out 95% mortgages.
Osborne noted the criticism the Help to Buy scheme has encountered recently, as it is blamed for fuelling a housing bubble.
‘I know that some would take a more ideological position and end the Help to Buy scheme altogether. They would return to the situation where only those first-time buyers lucky enough to have rich parents would be able to afford the large deposits demanded by the banks. My approach will be dictated by the facts, not by ideology,’ he said.
The chancellor said the International Monetary Fund had last week noted Help to Buy was working to help low income families and first-time buyers outside of London to purchase homes.
‘It is not fuelling house price inflation in London or at the top of the market. It is helping families, and that is how we intend to keep it,’ said Osborne. ‘I’ve taken big new steps to protect financial stability, strengthen the new role of the Bank and completed the range of tools at their disposal.’
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