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Rates Should be Used Only as “Last Line of Defence”

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Chairman of the US Federal Reserve Janet Yellen said research revealed that had the Fed increased interest rates to prevent a housing bubble in the US a few years ago, it would have done major harm to the economy and not had much of an influence on the property market at the time either.

The chairman agreed with the Bank of England’s decision to implement their macroprudential toolkit as she felt that will be “the primary role” in keeping the economy stable. She’s convinced that monetary policy would more than likely increase inflationary pressure plus have an adverse effect on unemployment.

Pedestrians walk past the Bank of England in the City of London

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Last Thursday, BOE governor Mark Carney announced the Financial Policy Committee’s plans to cool down property prices and consensus of opinion was that properties in London and the South East were the main areas they were focused on. The bank decided to introduce extra guidelines for lenders to follow when issuing out new home loans.

One of the measures was restricting lenders to loaning out no more than 15 per cent of their lending to borrowers who are wanting to take out loans that are more than four and a half times the amount of their annual earnings.

Another was insisting that all loan applicants are able to afford a three percentage point increase in rates. These are slight modifications to the MMR that the FCA introduced at the end of April.

Ms Yellen said, “Macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and likely more effective methods.”


Janet Yellen

She added, “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment.”

Earlier this week the Bank for International Settlements criticised the BOE for taking this route. The BIS said, “These tools have proved very helpful in increasing the resilience of the financial system, but they have been only partially effective in restraining the build up of financial imbalances.”

Bank of England Chief Economist Andy Haldane supported the BOE and the US chairman’s opinion yesterday by reiterating that the UK should only use monetary policy as a last resort if financial stability becomes threatened.

Mr Haldane stated, “We’ve said at the Bank that monetary policy can on occasions have a role to play in insuring against these financial stability risks – not as a first line of defence, but sometimes as a last line of defence.”

Meanwhile, Bank of England deputy governor Sir Jon Cunliffe has since conducted an interview with the BBC. Sir Jon told Radio 5 Live that “property prices rising faster than people’s incomes is the biggest risk to UK financial stability”, and that can cause “a big increase in the amount of debt in the economy.”

Yesterday the Nationwide’s House Price Index recorded the average UK property had risen to it’s highest level on record, showing the average figure for a property across the country at £188,903, an increase of 11.8 per cent within the last year..

London’s average is more than double that and has now gone through the £400,000 barrier. This has had a major impact for first-time buyers in the capital, as their average price has now shot up by a quarter within the same time frame to £351,783.

Lucian Cook from Savills spoke about the subject and summises, “Levels of recent price growth in London means that prospective home buyers have had to take on increased debt relative to their income to get on or move up the housing ladder. This is particularly effecting first-time buyers.”

The estate agent’s director of residential research continues to explain how this has caused a ripple effect for surrounding regions. “Buyers have had to cast their net much wider geographically across the capital, bringing demand and price growth to some of the less expensive markets.”

About the author

Peter Davis Peter Davis is a Marketing Analyst at PaydayLoan123 specialising in financial products. Peter writes most of our articles as he stays up to date with the latest information. He enjoys most sports, particularly playing football and watching his favourite football team. Peter really like his food too as we have all witnessed first hand!

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