Outgoing Monetary Policy Committee member Charlie Bean acknowledged the central bank has created prudential tools to curb risk, such as the Financial Prudential Committee. But he said monetary policy can still play a role in controlling “irrational exuberance” in mortgage lending.
In a speech at the London School of Economics, he said: “Compared to the impact of changes in interest rates, we have relatively little experience of deploying macroprudential instruments. And there will often be scope for those affected to work out ways to circumvent them, including by moving activities outside the regulatory perimeter.”
Monetary policies such as raising interest rates may be blunt, he added, but they are effective: “There may well be times when monetary policy is the only game in town to guard against incipient financial stability risks.”
Bean’s comments came after Bank of England Governor Mark Carney described sharply rising house prices as a risk to the recovery. However, he has also suggested an interest rate hike would be an overly blunt way to cool the housing market.
Pressure has instead increased on the coalition to abandon the Help to Buy mortgage guarantee scheme, in which the state acts as a guarantor for borrowers with a 5% deposit.