Leaving aside Suarez references for now, the Bank of England has today taken the opportunity to bare its teeth in the new power given to it under the guise of the Financial Policy Committee (FPC). Previously, the Bank monitored financial stability and conditions, but did not have the power to take action. That changed post-financial crisis, with the FPC given macro-prudential tools to tackle perceived financial excesses or potential issues.
The measures announced today are seen as insuring against the “risk of a marked loosening in underwriting standards and a further significant rise in the number of higher indebted households”. These include assessing affordability in the first five years of the loan were rates to rise 3% higher than that prevailing at the time of origination. Furthermore, the PRA and FCA have been tasked with ensuring that mortgage lenders limit the proportion of mortgages at load to income multiples of 4.5 and above to no more than 15% of new mortgages.
So why is sterling higher? Two things; earlier this month at his Mansion House speech, the Bank of England governor stated that “macro-prudential policy is not a substitute for monetary policy” and further added that if it is used for insurance (as today’s measures have been described), then “it won’t necessarily affect the path of interest rate increases”. The Governor also stated in the press conference today that these measures don’t reverse activity and don’t slow the economy.
Secondly, today is being taken as a sign of a Bank not shy of taking action and the market has become more sensitive to the possibility of an early interest rate increase. This can be seen in interest rate futures (short sterling) and also 2 year yields, both of which were pretty much unmoved by the Treasury select committee hearing earlier this week and today are pricing in an earlier rate increase than before.