LONDON: Raising British interest rates would be an effective but “very blunt” way of tackling risks to financial stability from booming asset prices, deputy Bank of England Governor Jon Cunliffe said.
British house prices are rising at their fastest rate in nine years — led by a 26 percent increase in London — prompting some speculation that the central bank may need to raise rates to keep them in check. But Cunliffe said rate rises were a last resort — a view also expressed by chief economist Andy Haldane — and that the central bank would prefer to use more targeted lending curbs first.
“Using interest rates to deal with financial stability risks can carry a high cost. It is a very blunt instrument that affects the economy as a whole. So although it is an effective line of defence, it should be seen as one of the last lines of defence,” he told business people in Liverpool.
The central bank has previously said its decision to raise record-low interest rates will be driven by how much slack is in the economy — and in particular the jobs market — rather than the level of house prices. Most economists expect the BoE to raise interest rates later this year or early in 2015, as the economy is forecast to grow quickly and wages start to pick up.
Cunliffe said the central bank was more willing to use interest rates to control asset prices than before the financial crisis, after seeing the damage that bubbles could do. “Knowing what we now know, we would be more prepared to use monetary policy to address financial stability risks,” he said.
Cunliffe also said that rising house prices were a now concern across Britain as a whole.
Last week the central bank required lenders to check that borrowers could cope with a 3 percent rise in interest rates, and said no more than 15 percent of new lending could be to home-buyers seeking to borrow more than 4.5 times their income.
Reuters
