Bank of England cuts mortgage support

THE Bank of England moved to head off the risk of a bubble in house prices yesterday, making a surprise announcement that it would put the brakes  on a scheme launched last year to boost mortgage lending. Shares in British construction firms tumbled after the central bank said it would refocus the Funding for Lending Scheme (FLS) on helping small firms that find it hard to borrow.

Britain’s economy and its housing market have staged an unexpectedly strong turnaround since FLS was launched by the BoE and finance ministry in July 2012 to spur lending to home-buyers and businesses.

Another, much-criticised, government programme to aid the housing market, Help to Buy, remains in place.
“We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market,” BoE Governor Mark Carney said.

Carney said it would “no longer be appropriate or necessary for us to have our foot on the accelerator” in terms of spurring mortgage lending. “It’s better to shift into neutral.”

Sterling rose after the announcement, while construction firms lost more than 1 billion pounds ($1.63 billion) in value. Barratt Developments, Britain’s biggest housebuilder by volume, saw its shares slump by as much as 9.6 percent.

Finance minister George Osborne said he backed the changes to the FLS scheme.
British house prices are likely to rise nearly 6 percent in 2014 on top of a similar  increase this year, according to a Reuters poll of economists published earlier this week.

James Knightley, an economist with ING, said the shift in policy was not a precursor to an interest rate hike by the BoE, which has kept borrowing costs at a record low since 2009.

“Such measures have been undertaken elsewhere, and there the sense is that by taking such action it can actually limit the need for direct monetary policy tightening,” Knightley said.

A representative of British mortgage lenders said the industry was well placed to cope without the scheme’s support.
“Although the changes to the FLS may be a  surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as  wholesale funding market conditions have improved and retail deposits are robust,” said Paul Smee, director general of the Council of Mortgage Lenders.-Reuters.