The multi-tasking Bank of England

Mark Carney Bank of England chief Mark Carney will be monitoring the housing market

Life used to be easier for central banks.

They targeted an inflation rate, usually 2% for developed economies.

And if they missed it, well, they're targeting it for the medium term anyway, so it'll be all right in two years' time.

But life has now become more complex and, like many of us, they need to multi-task.

They not only must target inflation, but unemployment, and also credit.

New challenges

The Bank of England targets price stability and has pledged to keep interest rates low at least until the unemployment rate falls to 7%.

It also has to keep an eye on financial stability.

The latter has been in the spotlight because of the government's Help to Buy scheme, which some have blamed for pushing up house prices.

The most recent survey from the Royal Institution of Chartered Surveyors showed that house prices were rising at the fastest rate in 11 years. Also, the Halifax has reported that house prices have had their biggest annual rise in three years.

Today's Bank of England's decision puts these new challenges into the spotlight.

No change is expected, as the Bank is likely to hold rates at 0.5% and announce no further cash injections.

But, the accompanying discussions will almost certainly cover how to manoeuvre in this new environment.

When I wrote about this issue before, the Bank of England had the unenviable task of worrying about above-target inflation while credit was anaemic.

By loosening monetary policy to boost credit, it risked injecting more cash into the economy that could raise inflation even further. That was a tough trade-off.

Bigger impact

So, the Bank of England came up with something more targeted - the Funding for Lending scheme that offered cheap loans to banks that in turn made loans to companies, hopefully, helping the smaller ones.

The government also initiated its Help to Buy programme that supported mortgage seekers, including those with only a small deposit to put down.

It arguably had a bigger impact in terms of loosening credit. As I mentioned before, house prices have risen even beyond London. However, critics say that the programme doesn't boost the supply of housing, which is the real issue.

For the Bank of England, it poses a dilemma. Credit is looking better this year, according to the Bank, but is hardly surging ahead in the entire economy. It is though, it seems, in the housing market.

Even in the Funding for Lending scheme, their last Credit Conditions survey points to growing demand for mortgages. Ideally, more loans are needed for small businesses who are the main job creators in the economy.

So, the issue is one of distortion in the credit market. It implies that the Financial Policy Committee may need sector-specific tools, say to specifically curtail risky-seeming mortgages if that becomes problematic.

Crucial discussions

No doubt this will be a hard call for the new governor Mark Carney and the members of the Monetary and Financial Policy Committees that have to coordinate the policies to achieve monetary as well as financial stability.

For what it's worth, at least the price and credit pressures are moving in the same direction. But, it will be tricky as the economy is still more than 3% below its pre-recession level. So, any tightening of credit conditions could hurt the recovery, even if it is worryingly unbalanced.

Today's lack of action from the Bank of England is likely to mask some crucial discussions. The minutes of the meeting when they are released later this month will be telling.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 10.

    Because the supply of money is determined by a small unelected group of bank executives we should be having a debate (or writing articles) as to why the creation of the most powerful utility in society; money, is in private hands. Is this not a very dangerous situation? I would suggest they are more powerful than governments and politicians? Focus the cameras at the City not Westminster...!!

  • rate this

    Comment number 9.

    6,8 The Bank of England (& the fools at the Treasury) have destroyed the good and well run businesses and people in this country just to protect their personal retirement jobs with the corrupting bankrupt business sector & banks.

    Sooner or later market forces will reassert themselves, they always do, but by then the whole Nation will be bankrupt.

    The ONLY way forward is to raise interest rates.

  • rate this

    Comment number 8.

    Capitalism requires that all business are subjected to the market forces that drive capitalism. The idiots have tried (and MUST and WILL FAIL) to keep alive bankrupt business (and individuals!). It cannot succeed - it never has in 3000 years and it never will, but what they have done destroys healthy sound business and individuals from the well run business to the savings of the pensioner. MAD.

  • rate this

    Comment number 7.

    4.sydiminky - "......Mortgages as opposed to business loans are the safest bet....."

    Erm, a few words spring to mind;

    Sub prime

    Financial contagion

    Bank bail outs

    Tax payers footing the bill

    remind me again how mortgages could possibly be the "safest" bet...???!!!

  • rate this

    Comment number 6.

    The idiots haven't the ability to grasp that the crash they think they have completely averted has to & will happen. (see the $2tn story)

    All these fools have done is make matters substantially worse. It is like going to the dentist and having a tooth pulled slowly over 10 to 15 years rather than having it yanked out in a couple of minutes.

    We must kill the zombies or they will destroy all.

  • rate this

    Comment number 5.

    Wen have a worryingly unbalanced recovery because the BoE and government are trying to re-inflate a worryingly unbalanced economy and banking sector!
    Property makes up 95% or more of banks loan books so FFL goes into mortgages - remember a BTL landlord is an SME up to £25 million in assets - and Help-To-Buy removes the 20% deposits the market demanded because it figured housing was overpriced!

  • rate this

    Comment number 4.

    The supply of money to the economy has been privatised for many years, its a myth that the BofE has any control through "monetary policy". The high street banks supply 98% of the money by loans thus creating credit/ bank deposits (the BofE issues 2% as notes and coins. Mortgages as opposed to business loans are the safest bet and are the conduit by which our "money" is injected to society.

  • Comment number 3.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 2.

    For all that BofE can have an influence on the economy they can only impact on Monetary policy...

    ...they have no control over Fiscal...

    ...neither Monetary nor Fiscal on their own make an economy... takes both...

    ...& what chance this dog of a Tory led Coalition Government rising above their u-turning Permashambles incompetence long enough to do something worthwhile....

  • rate this

    Comment number 1.

    Sadly the BoE has lost its credibility. It has allowed fiscal policy to setup the monetary policy.
    The impact of HTB is that the BoE will never increase rates. They dont have the guts to do so.
    This was obvious from the fact that FLS goes moslty into mortgages instead of SME but BoE does nothing.

    Can you also please hghlight how many ex-Treasuries personel are being added to MPC/FPC. Not good.


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