(c) 2013, Bloomberg News.
(c) 2013, Bloomberg News.
LONDON — Mark Carney is moving the Bank of England in a direction it hasn't taken in more than six years.
The governor took steps Thursday to head off a potential housing bubble by diluting a credit-boosting program, two weeks after raising growth forecasts and signaling interest rates might increase sooner than previously projected. Underpinning the need for the move were data Friday showing house values at the highest level in more than five years, and banks approving the most mortgages since 2008.
"It's a sign the Bank of England has confidence in the economy," said Jeremy Hale, head of macro strategy at Citigroup in London. "The market has taken this as a sign that the period of super-low rates is coming to an end. This probably brings the U.K. into the tightening frame earlier than other big developed economies."
The pound rose to the strongest level since January as investors bet the changes to the Funding for Lending Scheme nudge the BOE toward an exit from extraordinary stimulus as the economy grows at the fastest pace in three years. The direction contrasts with that of the European Central Bank, which cut interest rates last month and is reviewing whether it needs to do more to keep credit flowing.
Britain's 0.8 percent growth in the quarter through September was the quickest among the Group of Seven nations, according to the Organization for Economic Cooperation and Development. That compares with 0.3 percent in Germany and 0.1 percent in the euro area, Britain's biggest trading partner.
The brighter outlook for the British economy and speculation that interest rates may be increased as early as the end of 2014 have helped push the pound up more than 7 percent against the dollar in the past six months.
The BOE's Monetary Policy Committee has linked its benchmark rate to unemployment and said it won't start considering an increase until joblessness falls to 7 percent as long as inflation remains anchored and financial stability isn't threatened. Based on BOE forecasts, the 7 percent threshold may be reached as early as the fourth quarter of 2014.
"It was only seven months ago when there were concerns about a triple-dip recession and people were talking about more stimulus," said Nick Bate, an economist at Bank of America Merrill Lynch in London and a former British Treasury official.
"Now, seven months later, the discussion is all about housing booms, so extrapolate that forward another year, then you will have had a pretty long run of decent growth," he said. "The environment will be very different and the focus will be on when it's time to start raising rates."
The BOE last increased borrowing costs in July 2007, before global markets seized up. Five months later, officials cut the key rate by a quarter point to 5.5 percent.
It reduced benchmark borrowing costs to a record-low 0.5 percent and added government bond purchases and credit-boosting programs to nurture the recovery. As recently as June, three members of the MPC voted to expand bond buying.
Carney's measures coincide with evidence that demand and prices are rising. Lenders granted 67,701 mortgages in October, the most since February 2008, the BOE said Friday. Home values increased 0.6 percent in November from the previous month to an average 174,566 pounds, Nationwide Building Society said. They climbed 6.5 percent from a year earlier, the fastest pace since July 2010.
For economists at HSBC Holdings, ING Bank and Goldman Sachs, the measures may allow the BOE to keep interest rates lower for longer. That's because the action by its Financial Policy Committee shows it can use macro-prudential tools to target specific problems in the economy.
"Today's report is not particularly hawkish," Simon Wells, an economist at HSBC in London and a former BOE official, wrote in a note to clients Thursday. "The BOE wants to use new macro-prudential tools to calm the housing market, rather than deploy the blunt instrument of higher interest rates. This approach supports our view that rates will be on hold until late 2015 at the earliest."
Carney, who introduced forward guidance in August, one month into the job of BOE governor, has said he won't consider raising rates until there is sustainable economic growth. He said yesterday the housing curbs will help him keep that pledge.
"The package of measures I have described today will contribute to a constructive evolution of the housing market," he said. "By reinforcing financial stability, they further reinforce the MPC's ability to provide exceptional monetary stimulus to the entire U.K. economy for as long as it deems appropriate."
_ With assistance from Scott Hamilton in London.