Between now and the first hike we are likely to see the BoE to follow the lead of other central banks by relying on macroprudential measures to help cool the housing market.
We have highlighted that when it comes to macroprudential measures at the top of the list is to put an end to the governments Help to Buy scheme with the BoE already having taken its foot off the accelerator by ending support to the housing market via the FLS last year.
BBC’s Peston reports that he has learnt that the BoE governor favours reducing the maximum size of the loan under help to buy to £350k or £400k from £600k.
The key here is that in addition to changing the script on forward guidance the BoE will take measures to deal with concerns that its actions are helping to fuel another housing bubble.
One of the lessons from the built-up to the financial crisis was that central banks did not tighten aggressively enough and focused too much on inflation and not enough on credit growth. The argument that activity in the housing market is recovering from a low base has merit but providing additional support when demand already outstrips supply seems folly.
The BoE has already taken a mini-step towards the use of macroprudential tools when it tightened mortgage approval standards. The BoE governor has told us that he intends to prevent the housing market from entering “warp speed” as interest rates are kept low. We think that the BoE will deliver further measures from the macroprudential toolkit in February or March.