Bank of England divided over dilemma of soaring house prices
An external member of the Financial Policy Committee poured cold water last night on hopes that the Bank of England's new macro-prudential toolkit would be able to prick asset bubbles. He hinted at a potential disagreement with Mark Carney, the Bank's Governor, and cast doubt on the widespread belief that the committee is poised for action to curb the housing boom.
Delivering his first speech since joining the committee last year, Richard Sharp said people should not expect the new regulator to be "omniscient" and cautioned that it was unrealistic to expect the Bank to be able to spot asset price bubbles in advance.
"We should remember that it is always easy to see bubbles in hindsight, but it is not always as easy to see them when they are developing," he told an audience at the London School of Economics. "Certainly my experience has led me to be all too well aware that to seek to forecast future market directions or developments is invariably an extremely hazardous exercise."
Mr Sharp's sceptical tone contrasts with Mr Carney's belief, expressed last month, that the Bank would be able to hold interest rates down for an extended period because regulators could use the new macro-prudential toolkit to neutralise risks to the financial system.
One area where the FPC has come under pressure to deploy these tools is in relation to the housing market, where prices are rising nationwide at about 10 per cent a year. Many have called for the committee to recommend watering down the Chancellor's Help to Buy mortgage subsidies at its meeting later this month to take some heat out of the market.
But in his speech last night Mr Sharp, who spent 23 years at Goldman Sachs and is now chief executive of DII Capital, questioned whether it was appropriate for regulators to intervene. "If a bubble is funded by bank debt I think the answer is likely to be yes, but it is unfortunately less clear-cut if the links between a bubble and financial stability are less obvious," he said.
In the current housing boom prices have shot up over the past year without a corresponding increase in mortgage approvals and bank debt. The London market, where prices have been rising the fastest, is dominated by cash buyers, rather than by people taking out mortgages.
At last month's Inflation Report press conference Mr Carney said that raising interest rates to deal with booming house prices would be the "last line of defence" against a housing bubble. He stressed that macro-prudential tools could do the job successfully.
In contrast Mr Sharp stressed "the current lack of definitive empirical evidence" that such tools will work. The apparent divergence of views suggests the FPC could be divided on how to respond to the housing market. The committee is due to release its latest Financial Stability Report on 26 June.
Mr Sharp suggested last night that rather than seeking to head off shocks to the financial system, the FPC's main duty was to make the financial system resilient to them.
"It is better that the FPC should be viewed as unequivocally accountable for ensuring that, when such shocks do occur – and indeed they will – the system has built up sufficient strength and resilience so that such events can be effectively managed," he said.
Euro growth slows: ECB to loosen policy
Price cuts by eurozone firms failed to prevent business growth from losing momentum in May, all but sealing the case for looser monetary policy a day before the European Central Bank meets.
Markit's Composite Purchasing Managers' Index (PMI) showed that while output across the bloc remained solid in May the pace of growth eased – despite output prices falling for the 26th straight month.
"Today's PMIs remain consistent with some recovery in the eurozone," said Annalisa Piazza at Newedge Strategy.
"That said, we rule out that the picture of moderate recovery will be an obstacle for the ECB to justify further accommodation this week."
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