MPC to liaise with FPC on rate rises and housing risk
This is according to Martin Taylor, external member of the Financial Policy Committee, speaking at the joint Black Country Reinvestment Society and Black Country Diners Club networking lunch, in Wolverhampton yesterday.
He said: “The FPC is increasingly being given a backstopping role in policies that are designed by others to pursue their – quite desirable – objectives but that have the potential to generate financial instability at a later date.
“Our friends on the MPC consulted us on becoming a backstop to their commitment not to raise interest rates at least until unemployment falls to 7%. That policy is designed to promote a recovery in jobs, incomes and output in the UK.
“We agreed to tell the MPC if, in our judgement, persistently low rates were generating risks to financial stability that we could not contain with the tools available to us.
“They will reconsider their policy if we do so.”
The FPC’s job is to protect and enhance the stability of the financial sector in the UK, while remaining mindful of the need to support economic growth. It is gaining importance as the economy grows.
More recently the Chancellor George Osborne has said that he will take recommendations from the FPC once a year, beginning in September 2014, on changes to the details of his Help to Buy scheme.
Taylor said: “It is a great compliment to the FPC that it is thought fit to carry these responsibilities and I can assure you that we take them very seriously.
“But we must recognise that, as we take on responsibility to backstop policies designed by others to pursue their objectives, the balance of our work will shift away from adjusting the structure of the financial system to make it more resilient and towards monitoring the current situation for emerging risks.”
One not-so-emerging risk is obviously the housing market and Taylor admitted the FPC does have its eye on the situation.
“I don’t know what, if anything, the FPC will decide at its future meetings to do about housing, though we made it very clear in the record of our September meeting that we have our eye on developments.
“I don’t think, personally, that it should be the FPC’s job to stop house prices going up. Indeed, if you have an economic recovery, rising numbers of households and very tight supply – all of which we seem to have at the moment – it would be surprising if they didn’t.
“But then add to that low official interest rates and a government scheme in Help to Buy 2 that – and, in isolation, this feels like quite a desirable objective – will give access to the market to those potential buyers who have enough income to service a mortgage but not enough capital to put down a deposit, and you certainly have some vigorous facilitation of demand.
“What might the FPC be looking out for under these circumstances, and why might it worry? We are watching for signs of over-extension on the part of the banks and the public, especially signs that borrowers were not in a position to withstand an eventual rise in interest rates, signs in general that a more speculative market might be developing: these might be expected to attract our attention.
“Housing boom and bust and financial stability make uneasy bedfellows.”