Bank of England policy maker Ben Broadbent said easing bank funding conditions and an improvement in credit supply could warrant tighter policy even if U.K. private debt levels remain high.
“Any abatement in overseas risks -- which now reside more in the euro zone than in the U.S. housing market -- would have favorable effects on the funding costs of British banks and on the supply of credit to the domestic economy,” he said in a speech in London today. This “could warrant a withdrawal of monetary accommodation by the MPC even if domestic debt-income ratios remain well above some notional historical ‘norm’.”
Still, Broadbent said that he’s not in favor of tightening policy now and that it was right for the Monetary Policy Committee to raise the target for bond purchases by 50 billion pounds ($78 billion) to 325 billion pounds last month. The U.K. economy shrank 0.2 percent in the fourth quarter and Broadbent said banks’ borrowing costs remained elevated even after the European Central Bank’s three-year loans.
“With the domestic economy still fragile” and “funding costs for European banks -- including the U.K.’s -- still high, I thought it was right to vote for further asset purchases,” Broadbent said. Still, “if we focus solely on domestic debts -- residential mortgages in particular -- we are in danger of being too parochial about the key risks facing the economy.”
The policy maker said recent gains in commodity prices pose a risk that inflation may slow less sharply than forecast.
“Other things being equal,” the rise in oil prices since the Bank of England’s February forecast “would add a little to near-term inflation,” Broadbent told reporters. “It’s not clear how you respond to this because” there is also a risk to growth “if it were to go up a lot,” he said.
Still, “the near-term news has undoubtedly got better, certainly than was the case in November, because the ECB has succeeded in taking out a strand of this potential feedback loop between the banks and the sovereigns by insuring the funding of the banks,” he said.
However, “what it has not done necessarily is solve these underlying imbalances,” Broadbent said. “It’s bought a lot more time to address those issues. It has not in itself addressed them, so those risks are still there.”
In an analysis of the impact of pre-crisis excessive borrowing on economic growth, Broadbent said it’s a mistake for officials to focus on the burdens faced by indebted households who bought property, because their borrowing was accompanied by capital gains earned by sellers.
“For the aggregate private sector, all this extra debt was being used not to finance above-income spending but -- it appears -- an equally rapid accumulation of financial assets,” he said. There’s been “a very significant transfer of financial resources from young to old, one that leaves aggregate household balance sheets unchanged.”
The expansion in aggregate household balance sheets means that they’re more sensitive to higher interest rates. Still, that shouldn’t pose a barrier to policy makers raising rates. An analysis of a case where the bank raised its key rate to 5 percent from the current 0.5 percent would be “pessimistic” if it excluded an offset from tighter mortgage spreads, he said.
“Increased sensitivity should not be seen as an over- riding deterrent to any withdrawal of the monetary stimulus, if and when that becomes justified,” he said.
Broadbent said what “distinguished the U.K. was not so much the size of its mortgage market but the extent and riskiness of its banks’ overseas balance sheets.”
“It is there that most of the losses were made, and there still, in my view, that the larger risks reside,” Broadbent said. “As such, it is perfectly possible that funding and credit conditions could improve, and a withdrawal of monetary accommodation become warranted, quite independently of the gearing of domestic creditors.”
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