Mortgages

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.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.


USA 

Minutes of latest monetary policy committee meeting signal interest rates could rise sooner than 2016. Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring…

 


Powered by Guardian.co.ukThis article titled “Growing evidence of ‘robust recovery’ in UK economy, says Bank of England” was written by Heather Stewart, for theguardian.com on Wednesday 23rd October 2013 10.34 UTC

Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring, raising the prospect of an earlier-than-expected rise in interest rates.

The Bank’s nine-member monetary policy committee voted unanimously to leave policy unchanged earlier this month; but minutes of their meeting showed that a strong increase in employment, and upbeat readings from business surveys, had prompted them to upgrade their expectations for growth.

Discussing the upbeat jobs data released this month, the minutes said: “It now therefore seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report.”

They described the latest news as pointing to a “robust recovery in activity” in the UK – though they also warn about the lack of the kind of rebalancing in the economy, towards trade and away from consumer spending, that the coalition was hoping for. “There is a risk that the recovery in the United Kingdom might be less well balanced between exports and domestic consumption than was ultimately needed.”

One of the Bank’s first decisions after its governor, Mark Carney, joined in July was to issue “forward guidance”, promising to keep interest rates unchanged until the unemployment rate falls to 7%, barring a surge in inflation.

When the policy was unveiled in August, Carney said he expected unemployment to remain above 7% at least until 2016; but a slew of data, including a fall in the unemployment rate to 7.7% in the three months to July, had raised doubts in markets about whether the Bank would wait so long before deciding to act. Wednesday’s minutes suggest the MPC may be coming round to the idea that the 7% threshold could be reached sooner, though the committee stressed that “it was too early to draw a strong inference about future prospects from the latest data”.

Simon Wells, UK economist at HSBC, said: “We expect the MPC to bring forward the timing of unemployment hitting the 7% threshold by around two quarters when it revises its forecasts in November.”

Discussions among MPC members also highlighted the growing strength of Britain’s housing market, which they expect to boost the economy. “Overall, indicators pointed to continued house price rises. This would increase the collateral available to both households and small businesses, which could provide some further support to activity,” the minutes say.

In the latest indication of a revival in the property market, the British Bankers Association announced on Wednesday that the number of mortgages approved by UK banks to fund house purchases reached 42,990 in September, its highest level in almost four years and well above the previous six-month average of 42,990.

The BBA data, which covers the run-up to the launch of Help to Buy mortgage guarantee scheme, shows that activity in the housing market continued to gain momentum over the summer, with house purchase loans showing the biggest increase month-on-month.

The BBA said its members approved new loans worth a total of £10.5bn in September, up from £9.9bn in August and above the six-month average of £9bn. Of this, £6.7bn was for house purchases and £3.5bn for remortgages. The remainder was other secured borrowing.

The BBA statistics director, David Dooks, said: “September’s figures build on the growing picture of improved consumer confidence, with stronger gross mortgage lending, rising house purchase approvals and increased consumer credit.”

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

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.”

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.