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BoE’s Cunliffe says “rate hike is the last line of defence as a stability tool”

July 10th 2014
By: Melanie Hollidge

As house prices are increasing at their fastest rate over the last nine years, it has prompted speculation that the Bank of England might need to raise interest rates.  Jon Cunliffe, Deputy Bank of England governor said this would be a last resort – this view is upheld by Andy Haldane, chief economist. 
 
“Using interest rates to deal with financial stability risks, can carry a high cost.  It is a very blunt instrument that affects the economy as a whole.  So although it is an effective line of defence, it should be seen as one of the last lines of defence,” he told a meeting of business people in Liverpool.
 
Cunliffe advised that the bank would be more willing to use interest rates to control asset prices having seen the damage that ‘bubbles’ can do.  He said, “knowing what we now know, we would be more prepared to use monetary policy to address financial stability risks.”
 
The central bank required lenders to ensure that borrowers were able to cope with a 3% rise in interest rates, and said that no more than 15% of new lending could be for home buyers who wanted to borrow more than 4.5 times their income. 
 
“These measures should be thought of as insurance.  An outcome in which house prices grow more rapidly relative to income, and do so for longer is also quite plausible.” Cunliffe said in his interview with the BBC.