Bank won’t increase interest rates to stem house price rises

6th November 2015


The Bank of England has said it would not increase interest rates to stem house price rises as the rest of the economy would be hit too hard.


Bank of England deputy governor Nemat Shafik told the BBC that other tools should be used to sort out the housing market following yesterday’s inflation report from the Bank led economists to push back interest rate rise predictions.


Shafik said that research by the Bank suggested if it raised interest rates by two percentage points it would reduce household debt by 2% but economic growth by 2.6%, and therefore other tools should be used.


‘We have a Financial Policy Committee, which works alongside the Monetary Policy Committee (MPC),’ she told BBC Radio 5.


‘It has tools to do things like put limits on the amount of indebtedness that households can take on, it can reduce banks’ ability to lend very risky loans, so for us we need to use the right tools for the right problem.’


Shafik said while household debt levels were still hit they had reduced as a share of income.


‘It used to be about 155% at the time of the crisis, and it’s come down to 135%. It’s plateaued recently, but we do think it has improved,’ she said.


Yesterday, the MPC voted 8-1 to keep interest rates unchanged at 0.5%, the historic low they have sat at for the past six and a half years.


Rather than interest rates rising, Shafik said there is a possibility they could reduce further.


‘Just last month, we looked at this again and we said that actually we do have room to lower interest rates if we had to and we could do more quantitative easing if we had to and in fact the governor’s letter to the chancellor this month explains precisely that,’ said Shafik.


‘But the fact of the matter is: at the moment we don’t need any more ammo, because the economy is growing above trend. But what we have said it that we have it there if we need it.’

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