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 50.

    34.sydiminky - ".....ask yourself who benefits from the house price inflation?..........."

    Well, the Tories are stupid enough to think it benefits their re-election

  • rate this

    Comment number 49.

    48. depends who the "borrower" is. The reliance on the non productive credit creation in house mortgages is skewing the economy. It's driven by a homeowner who will spend any excess gain on consumption. The article points out, the BofE is talking about credit controls in the housing sector this needs to be maintained in favour of the borrower being a business creating real wealth.

  • rate this

    Comment number 48.

    @45 Thanks. But it's chicken and egg, again. The need or opportunity to increase credit was and is also driven by the borrower and hence, ultimately, by borrower expectations of future earnings (including asset inflation) which, to some extent, drive increases in earnings (and hence asset prices). There is a limit to such expectations, but no a priori finite multiple relative to actual earnings.

  • rate this

    Comment number 47.

    Ok we know the UK is in bed with the US but for once can the BOE do something for the UK and the rest of the world and raise interest rates.

  • rate this

    Comment number 46.

    Most people you speak to are not even aware about the $2tn story in the US or how it can affect you. Even in Australia people seem to know nothing about the issue & cannot see it having any affect on the A$. What does seem to worry me is like the 2008 US crisis the £ takes more of a hit than the $ Obviously its related to our finance industry which should have been cleaver enough to deal with it

  • rate this

    Comment number 45.

    44. Grounder. Correct..the main point as you quite rightly point out is that since the 70's and the opening up of the credit market the supply (injection) of money has largely come through issuing mortgages on the UK housing stock, hence our consumer society model. This needs addressing to a society that is productive and creates real wealth. Interest rate/house price/salary multiples are finite

  • rate this

    Comment number 44.

    I think John_from_Hendon and sydiminky should find themselves on the same side of a chicken-and-egg argument. UK growth over the last forty years (sometimes more inflationary, sometimes less) has been driven by an ever-expanding supply of money, driven by credit, driven by borrowers' belief (often correct) that the real cost of borrowing TO THEM is negative (because it is a lower rent).

  • rate this

    Comment number 43.

    41. John....I think you've got a jumble of ideas there...not very clear.

    You're talking about price inflation/deflation giving value to money. This is generally the knock on effect of an increase or decrease in the money supply (credit creation); depending on where we are in the economies credit cycle. As for the cost of creating that money it costs nothing more than a few electrons in a PC...!!!

  • rate this

    Comment number 42.

    The idiots have yet again chosen to steal from the people tosupport the bankers.

    They are the shame of economics.

    Guys, you have to raise rates and when you do so your whole house of cards will buckle, but you must do it for totally sound economic reasons. All you are doing now is to promote uneconomic businesses over sound ones. If you continue to do so you will destroy all sound businesses.

  • rate this

    Comment number 41.


    You really are without a grasp on much. The price of money needs always to be more than inflation reduces its value by or the whole thing collapses. The volume of money in circulation is moderate by a combination of regulation of the banks financial ratios & price of money.

    Raise the price of money and it costs more to create similarly tightening the liquidity ratios. Got it yet!

  • rate this

    Comment number 40.

    36. John....Your comment "price of money must always remain positive" has no meaning...!! It is the supply of money that is key to capitalism... without it, it all comes to a grinding halt as we have seen by a credit crunch; credit creation being the process and oil to the system. The banks have this monopoly...!!! Nobody else but they have this very special privilege....!!

  • rate this

    Comment number 39.

    I rather expect that the BoE's monetary policy committee is infested with those from the 'socially useless' thieving banking class, working to an agenda set by the equally banker infested useless IMF, WTO and World Bank.

    Who voted for these goons, those still in position after running the world's economy into near meltdown?

  • rate this

    Comment number 38.

    Ironically the last proper housing market crash in the 90s sparked an economic upturn due to low purchase prices and buyers spend post purchase. But for an unfortunate election outcome the then Government could have taken credit for the subsequent prosperity.

  • rate this

    Comment number 37.

    33 John from Hendon...These are not my ideas...this is the process by which our money is created. Until this process is clearly understood then we will not solve a single problem. A recent study showed that of the 665 politicians in parliament only 2% clearly understood the money creation process.... what chance have we got. The one eyed man sees all in the valley of the blind..!!

  • rate this

    Comment number 36.


    Your economic myopia is shocking. Haven't you understood anything about the last 3000 years of economic history?

    You cannot reinvent capitalism just for an apparent short term benefit. It will always come back and bite you in the behind quicker than you expect.

    Central to this is that the price of money must always remain positive - OR CAPITALISM COLLAPSES.

  • rate this

    Comment number 35.

    #32 it is now ONLY permissible to praise the current stupidity - things have come to a pretty pass when the cretins are allowed free play to destroy the country. But reasonable people armed with the force of history are prevented from highlighting their stupidity.

    Yes, the moderators are part of the problem - not the solution!

    Economic insanity must be highlighted as it blows us all away.

  • rate this

    Comment number 34.

    30. little old me; ask yourself who benefits from the house price inflation? That's right the Banks balance sheets (they feel better and start creating credit, remember they have the monopoly) homeowners think they're wealthy re-mortgage to fund builders, plumbers, painters, plasters, carpet fitters, B&Q, electrical goods, estate agents, solicitors, cars, school fees etc. The credit cycle...!!!

  • rate this

    Comment number 33.


    The inevitable consequence of your silliness is the complete collapse of capitalism - the ONLY economic system that has worked reasonably consistently for 3000 years.

    Your ideas are the cause of the banking collapse, the pensions collapse, the savings collapse & the creation of free money. Free money destroys everything. It destroys the propensity to save or invest or do anything.

  • Comment number 32.

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

  • rate this

    Comment number 31.

    Unlike most of the industrial nations, the UK have not allowed the correction of their overvalued HPs to happen

    Subsequently, we are just POSTPONING the inevitable laws of economics

    By fuelling yet more HP inflation with the ill conceived HTB scheme, we are treading a very precarious tight-rope
    It needs to be corrected with higher IR… PDQ


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