U.K. Stimulus Boosting Housing Risks

Bank of England Governor Mark Carney said the U.K. 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 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 today showed a measure of U.K. house prices rose to the highest in more than a decade last month. Carney 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 yesterday 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 introduced forward guidance in August to encourage businesses and consumers to hire and spend by pledging not to raise the benchmark rate until unemployment, currently 7.6 percent, falls to 7 percent. The BOE held the rate at a record-low 0.5 percent last week.

‘Pretty Comfortable’

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.

‘Big Question’

“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.”

The governor, who joined the BOE in July, also said that risks from high household debt, the housing market and Britain’s current-account deficit “merit vigilance but not panic.”

Carney said in the speech that the U.K. 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.”

Housing Boom

U.K. 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 today. That’s the highest amount in five years. The Royal Institution of Chartered Surveyors said today that its gauge of house prices rose to its highest since June 2002 last month.

“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.”

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

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