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Treasury Committee Meetings - 1St March 2011

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There are two meetings of the House of Commons Treasury Committee scheduled for today:


Financial Regulation


  • Mervyn King, Governor
  • Paul Tucker, Deputy Governor Financial Stability
  • Andrew Bailey, Executive Director, Banking and Chief Cashier
  • Andrew Haldane, Executive Director, Financial Stability, Bank of England


Bank of England February 2011 Inflation Report


  • Mervyn King, Governor
  • Charlie Bean, Deputy Governor, Monetary Policy
  • Paul Fisher, Executive Director, Markets
  • Professor David Miles, external member of the Monetary Policy Committee
  • Dr Martin Weale, external member of the Monetary Policy Committee

The meetings can viewed over the web via Parliament TV and should be available later from the following page:


I’m not expecting the financial regulation discussion to be particularly noteworthy, but the Inflation Report questioning may have its moments. The Bank’s inflation forecasts have been woeful, and of course the MPC is now under pressure due to CPI being well above target.

Also we may see the first signs of Mervyn King having to defend whether inflation targeting itself has any validity.

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Now that the uncorrected transcript of oral evidence for the Inflation Report meeting has been published, I'm adding the following extract for the record. It's an exchange relating to UK house prices.

Q38 Mark Garnier: Governor, in the past you and I have talked across this table about house prices and I think, if my memory serves me right, you said there was a possibility that we could see a further 20% or 30% decline in real terms in property prices. Do you still stand by that?

Mervyn King: There is always a possibility of many things. What I have also stressed is that, in my judgment, the single biggest factor influencing the upward movement of house prices in recent years was the move to very low levels of long-term real interest rates in the world economy, and hence in our capital markets. That meant that any asset price was likely to rise and house prices did indeed rise.

The interesting factor is that unlike the United States, which has particular problems in its own housing market of a structural kind, in our housing market there was, after 2008 and the immediate crisis in the banking sector, a 15% fall in house prices, since when house prices rose a bit and then they have been either static or falling back very slightly.

I think the influence of that low level of long-term interest rates is still very evident. The biggest risk to house prices, I think, is not so much developments in our economy but developments in the world economy that would mean that we suddenly move to a world in which real interest rates are very much higher. We all talk about the need for a rebalancing of the world economy, and I have talked about it more than most, but if it happened tomorrow and China suddenly decided to stop saving then real interest rates might well move up pretty sharply. Then we would start to see quite significant falls in asset prices around the world economy, and those would be major problems.

Q39 Mark Garnier: Is that a good thing?

Mervyn King: All these adjustments need to be carried out at a speed that is compatible with avoiding serious problems. That is one of the difficulties, not just in handling a national economy but also in thinking about the international economy and the imbalances in the world as a whole.

Q40 Mark Garnier: Have you done any work into the levels of people, numbers of households, in negative equity?

Mervyn King: Some work has been done, and no doubt in a minute Charlie will be able to remind you of the numbers that came out. What I find striking is that, compared with the early 1990s, the number of families who are in arrears on their mortgages, or the number of repossessions, is an order of magnitude lower now than it was then. It is much lower now than it was then. Part of the reason for that, of course, is that nominal interest rates have fallen, unlike in the late 1980s when nominal interest rates had to rise to very high levels to choke off what had become a domestically generated inflationary problem.

Charlie Bean: I don’t have a lot to add to that. That is the big point. The one thing that is worth saying is that this is not something where there are clear hard and fast numbers. You don’t know how much a household could sell its house for unless it tries to and the sources of information on this are twofold: there is information that the FSA has, connected with extension of mortgages, and you can make various assumptions about how house prices have evolved, post purchase and so forth. The other source of information is the survey that we carry out annually on household finances, where there is information from that that you can use to try and get a handle on whether households believe they are in negative equity or not. That second source of information tends to yield significantly lower numbers than the first.

Q41 Mark Garnier: Do you know what the numbers are, roughly?

Charlie Bean: I would have to go and look on the latest thing. There will probably be some numbers in the reporting for our survey in the most recent quarterly bulletin article. But the generic point that the numbers are much lower than we saw in the early 1990s I think is the key point.

Q42 Mark Garnier: That is very reassuring to hear, but it strikes me that there are a number of imbalances that are within the property market at the moment that are causing the problems. The first is there may well be a perception that a lot of people have negative equity. Negative equity doesn’t matter until you want to sell your house and if people believe they have negative equity and therefore they don’t want to sell their house then you are going to get a lack of movement of your labour market, in terms of going round.

I don’t think anybody thinks we are going to stay at this level of interest rate for very much longer, and obviously we were talking about this today, that in the longer term interest rates are going to go up. Clearly, what you are talking about, low interest rates supporting the property market, is also going to disappear slowly over time at the very least.

Finally, you have this other imbalance, which is first time buyers seem to be in their late 30s as opposed to in their early 20s when I first bought my house. This is restricting the ability of new buyers to come in at the bottom end of the market. All of these factors strike me as having to work their way through. I am very curious to hear your views on how these factors will work their way through, and if you also agree that it is ultimately a bad thing to have very high asset prices, for some of the reasons I have mentioned in terms of first time buyers. Contrary to that, obviously, is the movement of the labour market we discussed.

Mervyn King: The biggest threat in my view, as I said before, is how sustainable will this very low level of long-term real interest rates be. That is not something that is set in this country. It is a worldwide phenomenon and we have no control over it, although we can discuss with our colleagues in the G20 what the risks are.

I think at home there is no doubt that because of that the high level of asset prices relative to income flows has brought about a problem for people who want to get into the housing market, there is no two ways about it. There is an adjustment process then in which people have to save first to acquire the deposit in order to buy a house, which relative to income is much more expensive than it used to be. Of course, in turn, when they get to the end of their lifetime they will be bequeathing a much more valuable asset than they would have before.

In the short run, because we have not gone through a period when the mortgage rate dulled, then that has led us to a situation in which these problems of repossessions and mortgage arrears are much less severe than they were in the early 1990s. The point that I would make that ought to give us some comfort I think is this: one of the reasons why we cut bank rate to such a low level was because we knew that the banks would still be charging healthy positive rates to borrowers because they could not borrow at 0.5%. The banks were paying a hefty premium on bank rate to get hold of funds, so mortgage rates and borrowing rates in general did not come down anywhere near as fast as bank rate came down.

When we come to put bank rate up, at a point when we are wanting to move bank rate back to more normal levels, that is surely likely to be at a point when the banking system is in a healthier condition and can borrow at rates closer to bank rate, so that the increase in effective borrowing rates will not be anywhere near as big as the actual increase in bank rate, and that is-

Q43 Mark Garnier: So what you are saying is that you are adjusting the tilt of the short-term yield curve.

Mervyn King: It is the difference between the rates at which different categories of people can borrow, and rates to borrowers did not come down all the way to zero. Rates to savers did, sadly, but rates to borrowers did not. Equally, when it comes to putting up rates, we would be thinking that it was sensible to move rates up, in part because the borrowing rates would not go up one-for-one with the increase in bank rate. That is at a point we have not yet reached, where banks are able to return to more normal funding conditions, and we are still quite a way from that.

Q44 Mark Garnier: That opens a long philosophical question as to why you want to raise interest rates.

Chair: We are not going to get into that.

Mark Garnier: That we are not going to go into. I have one last question, which is do you think it is right that the Government should be stimulating the mortgage market and, if so, when the FPC starts its work in earnest how is the Government action to stimulate the mortgage market going to conflict with the FPC’s work to try and take the heat out of bubbles? Can you take heat out of bubbles?

Mervyn King: If the FPC feels that what action is being taken is causing a threat to the stability and resilience of the financial system and that that is posing a risk to the rate at which balance sheets and the real economy are rising, then we would have to use our policy instruments to try to offset that. Whether or not it is sensible for the Government to stimulate the mortgage market is, I am afraid, a question for you and this Committee. It is a political question, not for the bank to judge.

Q45 Mark Garnier: But you might have an opinion on that?

Mervyn King: Not as Bank of England. We try to stay out of politics as much as we possibly can. Even though you tempt us all the time to draw in, we are going to resist this temptation.

Mark Garnier: You are very resilient. Thank you very much.

Q46 Chair: Professor Miles has taken a look at this question in the past and your conclusion was that we should try and encourage more people to go on to longer-term fixed mortgages, wasn’t it?

David Miles: I would say that the conclusion that we had a few years ago was more that there were ways in which mortgages were sold in the UK that made variable rate mortgages look far more attractive, relative to fixed rate mortgages, than they would in a market that worked a bit more effectively. In particular, there was a structure of pricing where people were induced to take mortgages that looked very cheap, because you got a rate at the beginning of the mortgage that was very low relative to bank rate that the Bank of England set, and then some people would switch on to a higher rate later. These were discounted variable rate mortgages.

I think there are some problems with those products, partly because they were only sustainable for a while, because you were essentially cross-subsidising from people who had low mortgages and had been paying their interest for a long time.

Q47 Chair: Therefore, there is both the conduct of business aspect to this and a prudential aspect?

David Miles: I think there was. The world has moved on very substantially and now the structure of mortgage pricing I think is somewhat more sustainable. Those discounted variable rate mortgages do not exist to the same extent any more, and the degree of cross-subsidisation in the market to a large extent has disappeared. In some sense, we have a more sane structure of pricing in that people who are higher risk, have less good evidence of their income and want very high loan to value ratios, find it more difficult to get a mortgage, which is somewhat more expensive than for people who are very low risk. It is a painful transition to go through, but it is a transition that was absolutely necessary.

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Mervyn King: It is the difference between the rates at which different categories of people can borrow, and rates to borrowers did not come down all the way to zero. Rates to savers did, sadly, but rates to borrowers did not. Equally, when it comes to putting up rates, we would be thinking that it was sensible to move rates up, in part because the borrowing rates would not go up one-for-one with the increase in bank rate. That is at a point we have not yet reached, where banks are able to return to more normal funding conditions, and we are still quite a way from that.


Thanks for this, savers. You have been robbed for the greater good. You're hard earned savings, built up over many years of actual toil and hard work, which you probably have to buy a house are depleting every day. The proceeds of this theft, you will be happy to hear are benefitting two main reasons why you've been unable and are STILL unable to house your family appropriately.

1) a bankrupt, corrupt banking sector, enjoying high margins on borrowing/lending

2) over-indebted homeowners and BTLers.

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  • 285 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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