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 90.

    @89 Doesn't matter. The Bank of England can create money, and has recently done so. If UK banks stopped creating money (which they won't) and if we needed more money to be created (which we don't) the Bank of England would create it, unless the government chose to do it some other way (through Treasury Notes, for example).

  • rate this

    Comment number 89.

    88. Yes....The BofE does not create money...QE was undertaken for the first time in 350 yrs as an emergency measure. Only the commercial banks can create money by making loans thus creating a bank deposit. Once these deposits have been created they can then be traded and loaned through the secondary market. The banks have a unique power and one else can do this..!!

  • rate this

    Comment number 88.

    @86 No, that's not the point at all. First of all, the money has already been created. Secondly, if more new money is required than the banks create, the Bank of England can create it, as with QE (or the government could create it directly).

  • rate this

    Comment number 87.

    The idea that national debt is identical to personal debt is a bogeyman to frighten children & justify whatever economic & social policies they want to justify. Their protested fear & hatred of debt clearly doesn't extend to SMEs who they want to take on vastly more debt or student loans or mortgages which they think are highly desirable

  • rate this

    Comment number 86.

    84. The point is we have to borrow from the banks because this is how 98% of the money in our accounts/economy is created. The "lenders" are working in what is a secondary market lending those deposits that have already been created through the mainly mortgage/loan process. This is the meaning of power and that power and its use is closely guarded from the regulators and government..!!

  • rate this

    Comment number 85.

    Presumably one of their tasks is to bankrupt the country and saddle future generations with mountainous debt.

    We can look forward to either the first default in UK history or stratospheric inflation since they are the only options we have for getting shot of this debt.

  • rate this

    Comment number 84.

    @83 Of course the banks, collectively, control the banking sector. But they have no power to prevent new competitors arising within their sector; that power lies with the regulator. Our current banks are very powerful, without a doubt, but only for so long as their customers borrow from them rather than other banks or their equivalents, both of which should be encouraged by government policy.

  • rate this

    Comment number 83.

    82. Sure....but the power is in the creation of credit/purchasing power in society not "lending". This is a very subtle but important difference, hence they have an effective monopoly. They will allow "lenders" to function in the market but will actively control any other entrants into the real banking sector. The price of lending is competitive but they ultimately pose no threat.

  • rate this

    Comment number 82.

    @81 They are competitors in the market of supplying lending. It is of no consequence to their borrowing customers that they are not banks; their customers do not care whether their supplier is creating credit or selling their grandmother... Competition, here, is on price: a different model delivering an equivalent product (to the consumer) at a comparable cost.

  • rate this

    Comment number 81.

    80. But Funding Circle, Zopa, Credit Unions etc are not competitors they can not create credit. They are intermediaries between the lender and borrower just redistributing the available spending power. The banks can actually create the spending power...!!! Therefore the 60 or so board members of the 5 big banks have more spending power than 600 or so elected politicians....?? Not healthy..??

  • rate this

    Comment number 80.

    @78 I would certainly agree that there are too few effective participants in the banking sector, but not so few that the effect is "central planning". There are signs that the Bank of England is being more "activist" in its regulation than the wholly unlamented FSA ever was, but that is very much second best to many more strong banks and competitors (like Funding Circle, for example).

  • rate this

    Comment number 79.

    76. John....The BofE is effectively the lender of first resort. The banks make the loans first and then make good the reserve requirements on the overnight money markets within the inter bank settlement system. The BofE will always make central bank reserves available. They therefore have no effective control....haven't done for decades. It is an illusion of control for political purposes...!!

  • rate this

    Comment number 78.

    75. Agreed on the free market principal, but in reality there are very few controls on the banks; read light touch (no) regulation. They have a "monopoly" over the money supply and therefore very different to any other utility. They do not sit in a neutral position but have an active influence over the most profitable lending decisions and the direction of the economy; in effect central planning?

  • rate this

    Comment number 77.

    The mistake with funding for Lending is that in order to entice the banks to take it they didn't have to lend all of it within the conditions of the scheme enabling them to effectively replace deposits with it & drop savings rates to virtually nothing - but then without that they wouldn't have taken it. Some also seem to have been a bit sly in other ways & got out of increasing lending as intended

  • rate this

    Comment number 76.

    74.sydiminky "the BofE they have no direct influence on it's creation"


    The BoE can cause banks to hold more capital in the various tiers and force banks to make deposits with the BoE if they think the bank is being imprudent. Not only that they can raise bank lending rate to force banks to pay more for money.

    Stop assuming that the BoE are powerless - stupid yes - but not powerless.

  • rate this

    Comment number 75.

    @74 Most economic activity is (and should be) in private hands; think about food or energy supply. My point is that the banks' "power" is not unfettered; and money supply is better viewed as an effect of borrower demand rather than a cause (though, in truth, it is both). A free market moderated by appropriate and effective regulation finds reasonably optimal solutions to many complex problems.

  • rate this

    Comment number 74.

    67. The interest rate they lend at is not really the issue. The key point here is our money is created by commercial banks...not the BofE they have no direct influence on it's creation and the banks lending decisions. This has real social and democratic consequences. They determine who gets it and for what purpose. If they do not lend the economy enormous private hands..!!

  • rate this

    Comment number 73.

    @71 I mostly agree, John. But it is normal borrowers who determine the "soundish value" of money, based on what it is worth to them in their particular circumstances. Reduced demand for borrowing is keeping lending rates down. Increasing the price of money will not increase demand for it; rather, increasing demand will increase the price, so long as supply is constrained.

  • Comment number 72.

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

  • rate this

    Comment number 71.

    57.G. But because sound money should really be soundish does not mean that unsound money is the real aim - see Weimar Republic's inflation. Money needs to be sound-enough for a normal lifespan.

    Creating money too quickly leads to inflation and creating iexponentially leads to rapid collapse (see 00-08).

    Money is now almost worthless (BoE's stupidity) hence the 7x over-subscription to get 6%!


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