Bank of England policymakers may need to take action to prevent a risky consumer borrowing binge as the economy recovers, the bank’s chief economist has warned.
Appearing before the cross-party Treasury select committee alongside the Bank’s governor, Mark Carney, Andy Haldane warned that consumer credit, in particular personal loans, had been “picking up at a rate of knots. That ultimately might be an issue that the financial policy committee [FPC] might want to look at fairly carefully.”
The Financial Policy Committee (FPC), created after the financial crisis, is meant to prevent a future crash by allowing the Bank to take action in particular markets without using the blunter tool of interest rates. Chaired by the governor, it has 10 members – but does not include Haldane.
The FPC has already stepped in to constrain mortgage lending but its powers to confront a credit bubble are untested. The latest data from the Bank showed the rate of growth of consumer credit picking up sharply.
Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, said: “The FPC has huge new powers which only small numbers of the public have so far been aware of, and it is particularly important that we hold them accountable. Many of these decisions were formerly the preserve of politicians.”
Carney told MPs he was limited as to how much he could say about the FPC, as he was in “purdah”, as its next meeting approached; but he confirmed the rapid pace of credit growth was something it might need to look at.
He added that the separate monetary policy committee (MPC), which sets interest rates, has to take into account the historically high debt levels of Britain’s households as it made interest rate decisions.
“Without question, more indebted households are more vulnerable,” he said. “The pressure on households because of the debt burden is significant. There is less margin for error.”
However, the governor also reiterated that he believed the moment for raising interest rates was approaching. “The question in my mind is when is the right time for interest rates to increase,” he said.
Carney was supported by an independent MPC member, the American economist Kristin Forbes, who has previously taken a hawkish stance. Forbes said the jobs market, which the Bank has been watching closely for signs that wage inflation was emerging, appeared to be improving. “A number of measures we look at are back to pre-crisis levels. All in all, the evidence is of quite a tight labour market,” she said.
The governor has stressed that the decision about whether to tighten monetary policy is likely to “come into sharper relief” at the turn of the year.
While just one MPC member, Ian McCafferty, has so far voted for higher borrowing costs, a widely anticipated rate rise by the US Federal Reserve in December is expected to open the way for higher UK rates.
However, the hearing also underlined the divisions about the shape of the economy within the Bank, with Haldane presenting written testimony underlining his judgment that interest rates are as likely to move down as up.
“Given the balance of risks, I have a neutral stance on the future direction of monetary policy. In my view, policy needs to be poised to move in either direction in the period ahead, depending on how the data and risks, domestic and international, play out.”
Carney also rejected the idea Haldane discussed in a recent speech, of abolishing physical cash at some point in the future, to allow interest rates to be made negative.
When MP Steve Baker raised the issue, the governor, who referred to his colleague throughout as “Mr Haldane”, said: “Just to be clear, there are no plans to abolish cash at the Bank of England. As Mr Haldane just said, it was a thought experiment.”
Asked whether, as Haldane suggested, rates might have to fall further from their record low of 0.5%, Mark Carney made clear he did not believe that was a “likely scenario”.
Gertjan Vlieghe, the new independent member of the MPC, expressed scepticism about the idea that fresh measures – such as direct cash transfers to consumers, known as “helicopter money” – might be needed to stimulate the economy. “I do think there are really big problems with helicopter money, because essentially it’s stating that we’ve abandoned our inflation target,” he said.
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