Raising interest rates might be the only effective tool the Bank of England has to cool the housing market, reports The Telegraph.
Charlie Bean, who retires at the end of June, said that while it was sensible for the Bank to use macro-prudential tools to control rapid price rises and manage financial stability risks, the untested nature of such measures meant interest rate rises could end up being the “only game in town” to deal with an overheating market.
“Monetary policy may be a blunt tool for addressing financial stability risks, but it does have the virtue that it gets in all of the cracks,” he said in a speech at the London School of Economics.
“So, there may well be times when monetary policy is the only game in town to guard against incipient financial stability risks.”
Mr Bean said effective use of macro-prudential tools, such as limiting the amount of money people could borrow as a multiple of their income or forcing borrowers to raise bigger deposits, would allow the Bank to keep interest rates – which have been held at 0.5pc for five years – lower for longer. However, he said the “Panglossian view” that maintaining price stability should always be left to monetary policy while financial stability risks should be controlled by macro-prudential measures was too simplistic.
Bank Governor Mark Carney, has described interest rate rises as the “last line of defence” against financial stability risks. Last week, he suggested that the Financial Policy Committee, which is in charge of maintaining financial stability, could recommend introducing new affordability tests for borrowers as soon as June’s FPC meeting.
Mr Bean said on Tuesday that it was important to keep the impact of mortgage guarantee schemes such as Help to Buy “in perspective”, and that a “relatively small number of mortgages” had been taken out under the controversial Government scheme.
He said it would be “perfectly sensible” for the Government to run the scheme, which is designed to help buyer access to the market, in tandem with tighter mortgage rules designed to curb “dangerous financial imbalances”.
Mr Bean also warned that Britain faces a “bumpy” return to higher interest rates that will be made more difficult by a “sense of complacency” among markets and ultra-loose global monetary policies.
“I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy.”
Mr Bean also said low levels of volatility in financial markets were “eerily reminiscent” of the run-up to the financial crisis as ultra-loose policies had increased investors’ “search for yield”, which can create bubbles. However, he believed banks were now in a much better position to weather shocks.