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Bank Of England Unexpectedly Reins In Plan To Boost Mortgage Lending

posted 28 Nov 2013, 08:54 by Mpelembe   [ updated 28 Nov 2013, 08:55 ]

Shares in British construction firms tumble after the Bank of England makes a surprise announcement that it will put the brakes on a scheme launched last year to boost mortgage lending.

LONDON, ENGLAND, UNITED KINGDOM (NOVEMBER 28, 2013) (POOL) -  The Bank of England (BoE) moved to head off the risk of a bubble in house prices on Thursday (November 28), making a surprise announcement that it would put the brakes on a scheme launched last year to boost mortgage lending.

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Shares in British construction firms tumbled after the central bank said it would refocus the Funding for Lending Scheme (FLS) on helping small firms that find it hard to borrow.

Britain's economy and its housing market have staged an unexpectedly strong turnaround since FLS was launched by the BoE and finance ministry in July 2012 to spur lending to home-buyers and businesses.

Another, much-criticised, government programme to aid the housing market, Help to Buy, remains in place.

"The way we would characterise it is we did not see an immediate threat coming from the housing market, but we are concerned about the prospective evolution of the housing market in the absence of some of these changes," BoE Governor Mark Carney said.

"So the concern is where this could go. We definitely see some short-term momentum, and we're starting from relatively high levels of evaluation and indebtedness of households. Those are the challenges," he said, adding the BoE was prepared to take "larger measures" to tame rising house prices if needed.

Carney said it would "no longer be appropriate or necessary for us to have our foot on the accelerator" in terms of spurring mortgage lending. "It's better to shift into neutral."

Sterling rose after the announcement, while construction firms lost more than one billion pounds ($1.63 billion) in value. Barratt Developments, Britain's biggest housebuilder by volume, saw its shares slump by as much as 9.6 percent.

Finance minister George Osborne said he backed the changes to the FLS scheme.

British house prices are likely to rise nearly six percent in 2014 on top of a similar a increase this year, according to a Reuters poll of economists published earlier this week.

Carney said the changes to the FLS did not have implications for Help to Buy, which aims to lift construction and aid home-buyers without large mortgage deposits, and which the BoE will review next September.

Economic growth in the three months to September was the fastest in three years, banks have far easier access to finance, and house prices are rising at their fastest for three years.

Most of the increase in house prices has been concentrated in London and nearby areas, but Carney said price rises now seem to be spreading more broadly across the country.