BOE Action to Rein In Credit May Lower Chance of Early Rate Hike

(Bloomberg) -- Mark Carney’s move to keep a lid on consumer credit growth could support his argument for keeping rates on hold.

The Bank of England governor said Tuesday that monetary policy is “the last line of defense to address financial stability issues” and that the actions of the Financial Policy Committee “allow monetary policy to focus on its job, which is returning inflation sustainably to target.”

Until recently, rapid growth in consumer spending kept the economy afloat after the U.K.’s decision to leave the European Union. The pound’s decline is also driving up inflation so that it now outpaces earnings, putting the brakes on consumption. While warning about the pace of credit expansion, Carney said it was still in line with increases in gross domestic product.

“It certainly points to the governor remaining comfortable that macroprudential policy is the place to look first if you’re concerned about the evolution of consumer credit,” said Victoria Clarke, an economist at Investec. “The economic data continues to dissuade them from the need to raise rates.”

Carney’s comments follow the central bank’s announcement that it’s increasing capital requirements for U.K. lenders to tackle risks posed by 10 percent annual gains in consumer credit, and to prepare for the uncertain outcome of Brexit talks. Regulators will also publish new guidelines next month for consumer lending to ensure risks are managed properly.

Not Time

While some members of the BOE’s rate-setting committee have argued that above-target inflation means an increase in bank rate is needed imminently, Carney has maintained that the risks surrounding the U.K.’s divorce from its biggest trading partner mean now is not the time to tighten monetary policy. 

The decisions of the FPC Tuesday could add weight to that view, meaning the BOE could stand pat when it announces its next rate decision and publishes new forecasts in August.

“At the margin, tighter macroprudential policy reduces the need for the MPC to start hiking rates any time soon,” said Bloomberg Intelligence economist Dan Hanson. He doesn’t expect an interest-rate increase until 2019.

Some policy makers including Michael Saunders, Ian McCafferty and outgoing MPC member Kristin Forbes to argued last month that an increase in the benchmark rate is needed. Chief Economist Andy Haldane also said this month that removing some stimulus in the second half of this year “would be prudent.”

Forbes used her final speech at the bank to argue that the BOE’s expanded remit may be one reason why the central bank has held off raising rates, and that sitting on multiple committees may skew the focus of policy makers. Carney shot back on Tuesday, saying the different roles complement each other.