The International Monetary Fund (IMF) has said that The Bank of England may need to consider raising interest rates if controls designed to curb risky lending don’t stabilise the UK’s financials. The IMF has made it clear that they are watching the UK carefully for signs of a property bubble.
The IMF expressed reservations about whether limits on mortgage lending would be enough to prevent another property bubble. However, it warned, that the Bank would have to be cautious in raising interest rates because of potential damage to the economy.
Christine Lagarde, who leads the IMF, said the “US and the UK in particular are leaving the financial crisis behind,” but in its latest World Economic Outlook (WEO) it also issued a warning, saying: “the UK, as well as Sweden and Switzerland, faces financial stability risks arising from housing and mortgage markets.”
The outlook said that “house prices, however, have increased by 10% across the country – in London, more than double that – and household debt, at 140% of gross disposable income, remains high”
The IMF acknowledged that the bank had started to use “macro-prudential” tools, which are controls designed to cool the housing market without any collateral damage. In June, the Bank of England introduced limits on high loan-to-income home loans to stop borrowers being loaned too much, and tighter mortgage lending criteria are slowing prices. This has resulted in a fall in the availability of home loans in the past three months, after eight quarters of expansion.
The IMF added, “Tighter monetary conditions could also be considered if macro-prudential tools prove ineffective at addressing financial stability concerns, but careful consideration would need to be given to the trade-off between damage to the real economy and the ultimate costs of financial vulnerabilities.”
However, with only two of the nine members of the monetary policy committee voting for a rate rise, the IMF said that it did not expect to see the first increase until the first half of 2015. It said that expected it to be a smooth process, without large or protracted disturbances in financial markets.
“In the UK, activity has rebounded and become more balanced, driven by both consumption and business investment, thanks to improving credit and financial market conditions and healthy corporate balance sheets. Growth is projected to average 3.2% in 2014 and 2.7% in 2015, about a quarter of a percentage point stronger than forecast in the April 2014 WEO,” the IMF said.