The Bank of England’s stability board is “keeping a beady eye” on Britain’s
roaring property market, Charlie Bean has said, amid warnings that the
economic recovery is too reliant on house prices and consumer spending.
Mr Bean, the Deputy Governor of Monetary Policy at the Bank, told the North
East Chamber of Commerce that there were “unmistakable signs that a robust
recovery is under way” in the UK. But he said so far not enough growth was
built on the stable pillars of business investment, higher productivity and
“To date much of the recovery has been on the back of higher consumer spending
and housing investment,” he said. He pointed out that last year consumer
spending rose 2.2pc while housing investment jumped almost 10pc.
He said the Bank’s Financial Policy Committee is aware of the “risk” in rising
house prices, rather than house building, and “excessive expansion” in
mortgage lending. “For that reason, the Bank’s FPC, which is charged with
maintaining the overall stability of the financial system, is keeping a
beady eye on the housing market,” he said.
Mr Bean warned it was “still early days” in the effort to ensure the UK
recovery is sustained. “For the recovery to be both sustained and
sustainable we really want to see three things happen,” Mr Bean said,
highlighting business investment, a “revival” in productivity growth and a
boost in exports to reduce the UK’s current account deficit.
He argued that business investment was lagging the recovery while confidence
returned but he said “there are reasonable grounds to expect that the
handover from households to businesses will be realised.”
But on the prospects for productivity Mr Bean said the “picture is murkier”.
He noted that output per person-hour worked is more than 15pc below where it
would have been if it had continued growing at its pre-crisis rate. This he
said was due to “over head labour”, the low rate of pay growth and banks
forbearing on loans to weaker businesses but extending credit to more
productive enterprises. “The course of productivity is absolutely central to
the durability of the recovery,” Mr Bean said.
Mr Bean said that the depreciation of the pound during the crisis – sterling
fell 25pc between mid-2007 and the start of 2009 – has led to a boost in
exports. But he argued that the level of exports, particularly of services,
has “to date been somewhat disappointing.” He said it might be “just a
matter of time” before exports grow more strongly but he warned an
appreciation of sterling would “not be particularly helpful.”
In terms of the Bank’s efforts to help the recovery, Mr Bean backed Mark
Carney’s new rates policy, dubbed “fuzzy guidance” by some economists. He
repeated the Governor’s pledge that a rise in interest rates, when it comes,
will be gradual.
“It is still early days and the MPC will be doing its utmost to ensure that
recovery is not nipped in the bud,” he said. “But when the time does come
for us to start raising Bank Rate, we should celebrate that as a welcome
sign that the economy is finally well on the road back to normality.”