Carney prepared to curb mortgage lending

Speaking at a business lunch hosted by the CBI in the East Midlands today he also took the opportunity to defend forward guidance – measures he set out earlier this month linking future interest rate rises explicitly to unemployment and inflation expectations.

And he announced that the Bank of England is allowing banks to reduce the amount of “liquid assets” they have to hold as part of their capital buffers in a bid to free up cash to lend in the wider economy.

Carney said new tools introduced following the financial crisis meant the Bank of England is now in a position “to supervise lending to specific sectors more intensively, to make recommendations to banks and building societies to restrict the terms on which new credit is provided”.

This could involve curbing specific types of lending if it is deemed higher risk or seen to be contributing to a house price bubble.

He also said the Bank would be prepared to raise capital requirements on mortgage or other types of lending to prevent banks and building societies lending too much so it didn’t have to resort to raising interest rates to make credit unaffordable.

He said: “Taken together, our actions create not just a more resilient system, but also one more able to support and sustain a recovery by serving the real economy."

His comments come after many in the housing market expressed concern that the government’s Help to Buy scheme could inflate house prices dramatically.

Both the Business Secretary Vince Cable and the former Bank governor Mervyn King have warned of the risk of a housing bubble caused by government support for mortgage lending unless equal focus is also put on building new homes.

Carney defended his decision to link future interest rate changes to unemployment earlier this month when he said the Bank was unlikely to raise rates above their existing 0.5% until unemployment, currently at 7.8%, fell to 7%.

Markets reacted by pricing in an interest rate rise much sooner than the Bank’s official expectation of 2017 with market expectations suggesting the first increase in Bank rate moving in from the end of 2015 to mid-2015.

Carney added: "One possible explanation is that markets think that unemployment will come down to 7% more quickly than we do.

"Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome.

"But policy is built not on hope, but on expectation. And we estimate there is only a one in three chance of unemployment coming down that quickly.”

He also reiterated that the 7% threshold is only “a staging post” to assess the economy.

He said: “Nobody should assume that it is a trigger for raising rates. I certainly have no hesitation in raising interest rates when required.”