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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    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
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    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 monopoly...no one else can do this..!!

  • rate this
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    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
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    Comment number 87.

    @85.SJH
    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
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    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..!!

 

Comments 5 of 90

 

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