Bank of England governor Mark Carney has warned policymakers were “acutely aware” of the risk of another house price bubble and vowed to step in and take action to rein in Britain’s resurgent property market if needed.
The new central bank boss said lenders could be asked to restrict borrowing terms or even be forced to hold more cash on their balance sheets to dampen down an over-heated property market.
His warning came as he also sought to reassure that interest rates were set to stay at record lows for at least three years as part of an effort to shore up his flagship “forward guidance” policy following a poor reception in the City.
In his highly-anticipated first UK public speech, Mr Carney insisted: “Rates won’t go up until jobs and incomes are really growing.
“The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely.”
The guidance, set out earlier this month, contained a series of caveats that have prompted fears that the Bank Rate might rise sooner than expected - sending bond yields up.
But Mr Carney said: “We do not intend even to consider raising it before unemployment falls to 7%.”
He added the Bank stood ready to launch more economy-boosting measures if future rate expectations begin hindering the recovery.
Mr Carney, who succeeded Lord King at the helm last month, also unveiled new plans to bolster bank lending by another £90 billion.
Facing mounting criticism over stringent demands for lenders to bolster their financial reserves, Mr Carney said all banks and building societies that meet the new capital requirements will be allowed to reduce asset holdings elsewhere on their balance sheets. This will reduce holdings by £90 billion once all eight major banks and building societies meet the capital rules.
“That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy,” he told business leaders at a CBI event in Nottingham.
Mr Carney gave an upbeat view of the UK’s economic prospects as he said there were signs the recovery is “broad based and set to continue”.
But he warned there will still be “bumps in the road ahead”, with emerging market economies under strain, some banks still needing to plug gaps in their finances and “uneven” progress in Europe.
And the UK economy is still lagging behind other countries, producing 3% less than it did five years ago, while Germany has grown by 2%, the US by 5%, Australia by 13% and China by more than 50%.
While the Bank’s task is to “secure the fledgling recovery”, he said this would not come at the expense of letting another credit and housing boom get out of control.
Fears of a property bubble have been fuelled as government initiatives such as Help to Buy, low interest rates and improved mortgage access, have sparked a bounce-back in the housing market.
Mr Carney said new powers handed to the Bank and its independent Financial Policy Committee mean it has the tools available to prevent another credit crisis developing, adding “we are now fully prepared to deploy them if that were needed”.
The address has been seen as an attempt by Mr Carney to go over the heads of City analysts and reassure over the Bank’s recent actions