Housing market

Financial policy committee ‘concerned about potential risks to financial stability’ from possible housing bubble. Bank of England policy makers agree to “closely monitor housing market indicators covering house price affordability and sustainability”…

 


Powered by Guardian.co.ukThis article titled “Bank of England committee flags up housing market concerns” was written by Jill Treanor, for theguardian.com on Tuesday 3rd December 2013 12.58 UTC

The Bank of England is continuing to closely monitor the affordability of mortgages and the lending policies of banks after taking steps last week to cool the housing market.

The record of the November meeting of the financial policy committee, set up inside Threadneedle Street to spot bubbles in the financial system, shows that concerns about the housing market had risen since their last meeting in June.

“Committee members had become more concerned about the potential risks to financial stability that might arise from developments in the UK housing market,” the record said.

After the meeting the Bank announced last week that the flagship Funding for Lending Scheme (FLS), which supplies cheaper money to banks and building societies, would end a year early for mortgages to focus on small businesses.

The record of the meeting shows that Bank of England governor Mark Carney informed the committee – made of Bank of officials and external members – that he and the Treasury had agreed to amend the FLS to focus on business lending.

“The governor informed the committee that HM Treasury and the Bank agreed that an amendment to the FLS to remove the incentive for new lending to households would be sensible … committee members welcomed this,” the record states.

The FPC, a key element of the coalition’s regulatory changes to avert another financial crisis, also discussed other options to dampen the mortgage market by forcing banks to hold more capital. This could be done “to specific types of mortgage lending, just to new lending or to the entire portfolio of loans”.

It could also take action if it was concerned about the affordability of mortgages by limiting the loan-to-value or loan-to-income ratios for mortgages.

“The committee agreed that it would closely monitor housing market indicators covering house price affordability and sustainability, indicators of indebtedness, underwriting stands, exposures of lenders to highly indebted households and the reliance of lenders on short-term wholesale funding,” the record said.

It also noted that borrowers might start to switch to fixed rate mortgages which, while helping households when interest rates rise, could cause problems for banks.

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USA 

Bank of England governor’s move to persuade markets that interest rates will not immediately rise has provoked skepticism. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz…

 


Powered by Guardian.co.ukThis article titled “Is Mark Carney’s forward guidance plan a step backwards?” was written by Heather Stewart, for theguardian.com on Monday 7th October 2013 14.00 UTC

If Mark Carney was going to live up to his billing as a “rock star central banker” – and his £874,000 a year pay package – he had to arrive in Threadneedle Street on a crashing crescendo. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz.

From the need for more women on banknotes to his love of Everton football club, Carney has had plenty to say on a range of subjects since his appointment on 1 July this year. However, it’s the Bank’s new policy tool of forward guidance that has provoked the most interest, and a good measure of scepticism, among seasoned Bank-watchers.

Honed by Carney in Canada and adopted by the US Federal Reserve and the ECB in different forms, forward guidance is a way of signalling to the public and financial markets how the Bank will respond to shifts in the economy. In this case, the monetary policy committee has pledged to keep interest rates at their record low of 0.5% at least until the unemployment rate falls to 7%.

“Forward guidance is an attempt to persuade the markets that interest rates are not immediately going to go up,” says John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. “It’s one more tool in the toolbox.”

However, as implemented by Carney and his colleagues in the UK, guidance is hedged about with three separate “knockouts” – rates would rise if inflation, financial stability or the public’s inflation expectations got out of control. Moreover, the governor has stressed that the 7% unemployment rate is not a trigger for a rate rise, but a “staging post”, which will not necessarily prompt tighter policy.

During a somewhat fraught hearing with MPs on the cross-party Treasury select committee last month, in which Carney sought to clarify the policy, chairman Andrew Tyrie expostulated that it would be a hard one to explain “down the Dog and Duck”.

Financial markets have also been less than convinced. The yield, or effective interest rate, on British government bonds – partly a measure of investors’ expectations of future interest rates – has risen rather than fallen since the Bank’s announcement. That is partly because the latest data suggests the economic outlook is improving, but rapidly rising bond yields can be worrying because they tend to push up borrowing costs right across the economy. Carney, though, has insisted he is not concerned.

Meanwhile the pound has risen almost 4% against the dollar since Carney took the helm – again signalling markets expect rates to rise sooner than the Bank is indicating. Last week sterling hit a nine-month high, although it came off that peak as investors began to question if the UK’s recovery could continue at its current pace.

“I don’t think in practice forward guidance is very successful,” says Jamie Dannhauser of Lombard Street Research. He believes Carney has failed to convince the City he means business, because he has failed to back up forward guidance with action, such as the promise of a fresh round of quantitative easing – the Bank scheme that has pumped £375bn of freshly minted money into the economy.

“[Forward guidance] doesn’t work if you’re not willing to take on the markets if you don’t get your way,” says Dannhauser.

David Blanchflower, a former member of the MPC, is more blunt: “He looks already, within a hundred days, to have lost control. Bond yields are rising, the pound is rising like mad, and they’ve got no response.”

He argues that the hedged nature of the new policy is likely to reflect “horse-trading” between Carney and his fellow MPC members. Unlike in Canada, where what the central bank governor says goes, decision-making on the MPC is by vote. With a recovery now under way, its various members are known to have differing views on what are the most pressing risks to the economy.

Another former MPC member said: “Had I been on the MPC I would have let him do it [forward guidance], because I don’t think it does any particular harm; but I don’t think it does much good either.”

It’s not just the Bank’s approach to monetary policy that has changed on Carney’s watch. When outgoing deputy governor Paul Tucker, who missed out on the top job, leaves for the US later this month, it will mark the latest in a number of personnel changes that are starting to make Carney’s Bank look quite different from Lord (Mervyn) King’s.

Blue-blooded banker Charlotte Hogg joined as the Bank’s new chief operating officer, a post that didn’t exist under the old regime, on the same day as Carney. Meanwhile Tucker will be replaced by former Treasury and Foreign Office apparatchik Sir Jon Cunliffe. With long-serving deputy governor Charlie Bean due to leave early in 2014, Carney will be given another opportunity to bring in a new broom.

Insiders say the atmosphere in the Bank’s Threadneedle Street headquarters has already changed. Carney is often seen eating lunch in the canteen or showing visitors around. His approach is less hierarchical than that of King, who was derided as the “Sun King”, by former chancellor Alistair Darling – though Carney is said to be no keener on intellectual dissent than his predecessor.

He will need all the allies he can get both inside and outside the Bank, if he is to deal successfully with what many analysts see as the greatest threat facing the economy: the risk that an unsustainable bubble is starting to inflate in Britain’s boom-bust housing market.

Carney and his colleagues on the Bank’s Financial Policy Committee (FPC), the group tasked with preventing future crashes which partly overlaps with the MPC, have new powers to rein in mortgage lending if they believe a bubble is emerging, and the governor has said he won’t hesitate to use them.

But the FPC is untested and largely unknown to the public, and bubbles are notoriously hard to spot. Using the FPC’s influence to choke off the supply of high loan-to-value mortgages, for example, would be hugely controversial at a time when large numbers of would-be buyers have been frozen out of the market. Meanwhile, the government’s extension of the Help to Buy scheme, with details to be laid out on Tuesday, is likely to increase the demand for property, potentially pushing up prices.

Van Reenen warns that if property prices do take off, Carney could find himself in an unenviable position. “We have this terrible problem in this country that house prices have got completely out of kilter with incomes. I would be very reluctant to see interest rates start pushing up. Using other methods, such as being tougher on Help to Buy, and trying to do things through prudential regulation is better – but the fundamental thing is lack of houses, and Carney can’t do anything about that.”

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According to the FOMC meeting minutes, “a few” officials were keen to make a move sooner and “a few” urged more caution. The minutes also revealed that some FOMC members were cautious about the still weak US recovery…

 


Powered by Guardian.co.ukThis article titled “Fed minutes show cautious move towards end of economic stimulus” was written by Dominic Rushe in New York, for The Guardian on Wednesday 21st August 2013 19.56 UTC

The Federal Reserve inched nearer to reining in its bn-a-month economic stimulus programme last month, according to the minutes of its last meeting which were released on Wednesday. But the central bank did not give any clear indication about when that scaling back might begin.

The minutes of the Federal Open Market Committee (FOMC) meeting which took place late last month offered a mixed view on committee members’ willingness to ease back on the so-called quantitative easing (QE) programme. According to the minutes, “a few” officials were keen to make a move sooner and “a few” urged more caution. The minutes also revealed that some FOMC members were cautious about the still weak US recovery. US stock markets were largely unchanged after the news was released.

Most FOMC members felt that growth in the economy would pick up in the second half of the year and further strengthen in 2014. According to the minutes: “A number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June.” The minutes described recent economic data as “mixed”.

The Federal Reserve chairman, Ben Bernanke, indicated in June that the stimulus programme could be scaled back later this year, if economic data continued to be positive. The news sparked a sell off in the equity markets but despite some volatility they have remained close to record highs.

The QE programme, the Fed’s third round of bond buying, is intended to keep rates low and encourage investment in the economy in the hopes of driving jobs growth. Bernanke has given no clear indication when any tapering in the massive bond-buying programme could begin; economists have speculated that it could come as soon as September or be delayed until next year.

The summary of the 30-31 July meeting said that while “a few [committee] members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases”, a few others “suggested that it might soon be time to slow somewhat the pace of purchases”.

The signals from the US economy are broadly positive but there are still many concerns. Unemployment rates continue to inch down but remain relatively high. The Fed minutes said: “Private-sector employment increased further in June, but the unemployment rate was still elevated.” The US housing market appears to be on the mend but some have worried that a recent rise in interest rates could have an impact. “While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates,” the minutes said.

Bernanke is widely expected to announce his decision to resign as Fed chair. His third term comes to an end at the end of January 2014 and President Barack Obama has said that he will appoint a successor this autumn. Bernanke will hold a press conference after the FOMC’s next meeting, in mid-September.

The two most likely candidates to take over Bernanke’s job at present are the Fed vice-chair Janet Yellen and Larry Summers, a former Treasury secretary who is one of Obama’s closest economic advisers.

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During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to stay the course. Interest rates are to remain low, but what does that say about economic recovery, inflation and house prices?..

 


Powered by Guardian.co.ukThis article titled “Five things we learned from the Bank of England inflation report” was written by Phillip Inman, for theguardian.com on Wednesday 7th August 2013 14.37 UTC


1. Interest rates are going to stay low for a very long time

Current predictions say the Bank will only consider raising rates in 2016, but it could be 2017 or 2018 before the economy is considered strong enough to cope with higher rates. It will not consider raising rates until unemployment declines to 7% (from 7.8%), and its own forecast puts unemployment above 7% in 2016.

2. The current economic recovery is fragile

The UK might have seen a 0.9% jump in GDP in the first six months of the year, but the Bank of England is concerned that growth remains weak. The level of GDP is below where it was in 2008 and well below where it would be if the crash hadn’t happened. High unemployment shows there is slack in the economy that can be deployed without causing inflation.

3. Fears of a house price bubble are misplaced

Governor Mark Carney argued that the level of transactions are well below the peak (about a third lower) and house prices are still below the highest point in 2008, so a bubble is a long way off. And anyway, he said, the central bank now monitors the big lenders for dodgy or risky practices, so a repeat of the crazy lending in the first half of the last decade is unlikely.

4. Inflation is not a worry

This is not something the Bank of England has explicitly declared in its quarterly inflation report. It says monetary policy committee is still watching for any signs of inflation. However, there is little pressure from rising wages and it blames the current 2.9% rate (well above the 2% target) on the rising cost of train fares and regulated monopoly suppliers such as those related to water rates and gas prices.

5. More quantitative easing could be on the way

During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to “maintain the current highly stimulative stance of monetary policy” and could even extend it. The Bank is unlikely to cut rates further, but could boost QE. It has pumped £375bn into the financial system to promote lending to little avail (it might have been even worse without it, said Carney’s predecessor Lord King). Some analysts argue it should rise to £425bn.

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This week UK GDP figures are expected to show a healthy increase, but is this the sort of recovery that benefits everyone? Analysts predict a growth rate of around 0.6%, perhaps even 0.8%, representing a strengthening of the recovery…

 


Powered by Guardian.co.ukThis article titled “Britain sees signs of recovery, but who has been left behind?” was written by Heather Stewart and Katie Allen, for The Observer on Saturday 20th July 2013 23.00 UTC

Row upon row of Range Rovers and Minis gleam in the afternoon sun in the yards around Southampton docks, waiting to be driven on to huge cargo ships that will carry them to car-hungry emerging economies.

From his office, port director Doug Morrison can see the towering cruise ships being loaded before they cast off for Mediterranean and Caribbean holidays. Alongside stands a ship awaiting a cargo of new cars, which arrive on the dockside on dedicated trains from manufacturers in the Midlands. Further along are container ships bringing TVs and clothes from the far east and a vast array of goods to stock Britain's shops.

"Two years ago there were 500,000 imports and exports of new cars here. This year it is 750,000 and I am pleased to say 65% of that is exports. They are from Jaguar Land Rover, Honda and there are Mini Coopers. Much of that growth is coming from Jaguar Land Rover sales to the far east," says Morrison.

This picture of a thriving British export sector is exactly the one the coalition will be hoping to project on Thursday, if, as experts expect, the latest GDP figures show the economy expanded at a healthy clip in the second quarter of 2013.

Analysts predict a growth rate of around 0.6%, perhaps even 0.8%, which would represent a marked strengthening of the recovery – good news for a coalition keen to seize on signs that the economy has moved "out of intensive care", as chancellor George Osborne puts it.

"We have a great economic barometer here. We can really see what is happening," says Morrison, who has run the docks for Associated British Ports since 2005. He talks about the "three C's" – cars, cruises and containers – and all point to an upturn, albeit with choppy seas ahead. "The cruise business continues to be very strong," he says.

Famous in the past as the port from which Titanic set sail on its ill-fated maiden voyage, Southampton now sees 1.6 million passengers embark and disembark from cruise ships every year. Less than a decade ago only a third as many were passing through the port.

But Morrison adds that the number of containers being landed has not risen – the lack of growth in consumer imports evidence of tough times on Britain's high streets. "When you look at what the likes of Tesco and Argos are saying, it's not surprising that you are not seeing any real growth in containers."

It is not only at the dockside that things are looking up, four years on from the depths of the recession. Jan Ward, chief executive and founder of specialist metals distributor Corrotherm International, based on an industrial estate on the edge of the city, says she is "overwhelmed with work".

"These have been the best five years we have had," says Ward, who started the company in 1992. On the back of strong demand for the nickel alloy parts the company supplies to the oil and gas industry, turnover grew 46% over the last year to £21m and Ward expects it to double this year. Corrotherm has recently opened offices in Abu Dhabi, Saudi Arabia, Korea and Perth in Australia and is about to open one in China.

Ward, an active member of the local chamber of commerce, believes the government's push for what the chancellor has called a "march of the makers" is finally starting to yield results. "All the signs that I see are very, very good. Finally, these messages are starting to get through to manufacturers and people who are looking to start businesses up. For the manufacturing sector things are looking very bright."

Despite her optimism, however, some economists are concerned that while a stronger GDP reading would undoubtedly be good news, there is so far little sign of the deep-seated shifts in the economy the government had hoped to bring about. Russell Jones of Llewellyn Consulting says: "It looks like what is driving this is the consumer to a large degree, and you could argue that that's the wrong sort of growth."

The housing market is starting to recover and retail spending is on the rise, but business investment in the first quarter of 2013 was more than 16% lower than a year earlier. Meanwhile the latest trade figures suggested that although exports are rising, so are imports, so that hopes of Britain becoming a new manufacturing powerhouse have so far proved over-optimistic.

Simon Wells, UK economist at HSBC, says: "Back in 2010, we were hoping the economy would rebalance in three ways: away from services and towards manufacturing; away from consumption and towards investment; and away from domestic demand and towards exports. Now it seems that for policymakers, any growth will do."

The Bank of England and the Treasury had expected the sharp depreciation in sterling since 2008 to spark an export revival, as British goods became cheaper on world markets. But the transformation has been hampered, both because our major markets have been in crisis and our industrial sector is so hollowed out that an increase in exports brings in its wake a jump in imports too, as manufacturers buy raw materials and parts.

At the same time, the decline in the pound has been one cause of the above-target inflation that has further hampered recovery by eating into workers' pay. Jones points out that with real incomes continuing to fall, in what the TUC has described as the longest squeeze on wages since the late 19th century, any rise in consumption is being driven by "people dipping into their savings".

There is certainly evidence in Southampton that the long-stalled property market is beginning to revive. Lisa Martin-Pope, who works in one of the many estate agents on the city's busy London Road, says: "The biggest indicator at the moment is we are seeing more first-time buyers and seeing banks and building societies lending to them more readily." Her agency, Martin & Co, is seeing homes selling more quickly, with the average buyer paying 93% of the asking price.

Labour will argue on Thursday that the benefits of the nascent upturn have been pocketed by a limited number of people, including those in financial services. Chris Leslie, shadow financial secretary to the Treasury, says: "Wages after inflation are now down by an average of £1,300 since David Cameron got into Downing Street, yet bank bonuses soared to £4bn in April as high earners took full advantage of the top-rate tax cut."

From his window on the docks, Doug Morrison agrees that not everyone is reaping the rewards of recovery. "The haves continue to spend and the have-nots cannot spend," he says. "People are reluctant to give up their holidays, the haves are still buying cars, but the poor people out of work or not getting any pay rises are not buying their three-piece suites or buying new clothes as often."

The haves are certainly in evidence at Southampton's Ocean Village marina, where shining white yachts are moored alongside motorboats. Luxury apartments overlook the water and in harbourside bars people sit around tables with glasses of chilled rosé and beer.

The only thing to spoil the idyllic summer scene is the sound of the jackhammers on the nearby construction site where a £74m, 24-storey apartment block will become Southampton's tallest building. James King, of local boat and home broker Waterside Properties, says there is a "cautious recovery".

But a short drive away from the marina, at Ford's soon-to-be-defunct Transit van plant, there's a powerful sense that not everyone is sharing in what Osborne calls the "healing" of recession-scarred Britain.

Engineer Chris finds it hard to conceal his dismay at losing the job he has had for 28 years. "It is devastating really. It's the end of an era. Anyone who has been here a long time is faced with a very empty shell of a plant. It is like a ghost town."

Chris, 52, who preferred not to give his full name, is moving to a new job with Ford in Wales, but not all his colleagues have been so fortunate, he says. "There's a lot of youngsters that have young families. We are closely knit."

When the factory is mothballed on Friday it will mark the end of more than a century of Ford vehicle manufacturing in the UK and more than 40 years of making Transit vans in Southampton. Faced with a prolonged slump in demand across western Europe that has seen new vehicle sales drop to a 20-year low, Ford is moving much of its production to a cheaper base in Turkey.

"The atmosphere in there is one of shock and disbelief. People are walking around as if they don't know what's happened. People in there I've known for years, grown men, they have been in tears," says Chris.

It remains to be seen if the long-hoped-for recovery that seems to be taking root will blossom as the year goes on, perhaps bringing with it the greater confidence for firms, and new jobs and pay rises for their staff, that would help to spread its benefits. Until that happens, most analysts will continue to be sceptical. "I'm still quite cautious about growth," says Wells of HSBC. "There must be a limit to how much we can grow when real, post-inflation wages are falling."

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