BUSINESS

Britain's need for stimulus raises housing risks, Carney says

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

LONDON — Bank of England Governor Mark Carney said the British economy needs further policy support and pledged to maintain vigilance over the risks easy money might create for the housing market.

"We need to provide a lot of stimulus, but that stimulus can create risks," Carney, 48, said in an interview on the "Charlie Rose" show aired on Bloomberg Television. "We need to take other steps in order to reduce those risks. If we don't, we're going to create bigger problems down the road or we're going to have to pull back too soon on monetary policy, which is the last thing we want to do."

Data Tuesday showed a measure of British house prices rose to the highest in more than a decade last month. Carney, the first foreigner to run the BOE, took action to head off a potential housing bubble last month by diluting a credit-boosting program. He said in a speech in New York Monday that the move will help officials keep monetary policy loose for longer.

"The true recovery is beginning," Carney said in the interview. "We've got big headwinds from Europe, from the currency, from ongoing deleveraging, from households" and "we have not yet seen businesses really starting to invest, really starting to believe in these recoveries."

Carney, who previously ran the Canadian central bank, took charge of the BOE in July and a month later unveiled his first major policy initiative when he introduced guidance on the future path of interest rates.

The new approach, which aims to help businesses and consumers make investment decisions, includes a pledge not to raise the benchmark rate until unemployment falls to 7 percent. The jobless rate is currently at 7.6 percent.

In a question-and-answer session after his speech at the Economic Club of New York, he said guidance has been "effective" in holding down short-term rates and bolstering the economy.

Britain's economic recovery accelerated in the third quarter as investment and house building helped to offset the biggest drop in exports in more than two years. Gross domestic product increased 0.8 percent from three months earlier, matching an initial estimate, data showed Nov. 27.

"I feel pretty comfortable about the near-term outlook," Carney said in the interview. "But the longer-term outlook is going to turn on these bigger questions of business investment, what happens to productivity, what happens to the so-called supply side of our economy."

While the economy is growing, it remains 2.5 percent smaller than before the global financial crisis. BOE officials project unemployment will reach 7 percent as early as the end of 2014.

"The supply side, this is the big question," Carney said. "Whether it's the Federal Reserve or the Bank of England, we both see that this adds impetus to giving stimulus now to get people back into work as quickly as possible."

In his speech, Carney said while news on the British economy has been "positive," the recovery needs more robust global growth and that strong demand from the euro area remains "some way off."

Data Tuesday showed industrial production rose 0.4 percent in October in a sign the recovery maintained momentum at the start of the fourth quarter. Factory output also increased 0.4 percent. A separate report showed that exports fell, while Britain's deficit with the European Union widened to a record.

The governor also said that risks from high household debt, the housing market and Britain's current-account deficit "merit vigilance but not panic."

He said that recovery will "need to be sustained for a period before productivity — and real wage — gains can resume in earnest."

On housing, Carney said in his interview that "there's some welcome recovery in the U.K. housing market, but let's be prudent, let's act early, let's ensure that it continues to evolve in a constructive way."

Gross mortgage advances rose 19 percent to 49.5 billion pounds ($81 billion) in the third quarter from the previous three months, and were 25 percent higher than a year earlier, the BOE said Tuesday. That's the highest amount in five years.

The Royal Institution of Chartered Surveyors said its gauge of house prices rose to its highest since June 2002 last month. In a sign that banks are offering a greater number of high loan- to-value mortgages, the BOE has resumed publishing rates on such loans in its monthly statistics. The average rate on a 95 percent 5-year fixed home loan was 5.3 percent last month. That compares with 7.1 percent in September 2008, the last time the BOE published such data.

"The steps we've taken have been to reinforce underwriting standards," Carney said in his interview. "There's a variety of ways where we could adjust the terms under which people could get mortgages if we had to. We could ask banks to put more capital behind every mortgage."

He added, "If you do smaller things early enough, you don't have to do the really big things later on."

_ With assistance from Michael Heath in Sydney. Editors: Fergal O'Brien, Craig Stirling

To contact the reporters on this story: Malcolm Scott in Sydney at mscott23@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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