BoE Stops FLS Mortgages Amid Fears of Bubble but Sparks Stalled Recovery Worry


The Bank of England (BoE) has unexpectedly stopped the mortgage aspects of its Funding for Lending Scheme (FLS) amid fears of a developing property bubble in the UK. But the move has sparked fears about a stalled recovery as some economists think the recovering housing market was largely responsible for the UK’s rapid rise up the growth charts this year.

The year-old FLS government-backed stimulation programme will now focus solely on business lending after the announcement by the BoE, with support for mortgage lending from Whitehall ceasing in January next year as part of an effort to target more finance at manufacturing and production in an attempt to rebalance the UK economy. FLS sought to funnel up to £60bn to businesses and individuals via UK banks and building societies, but the majority has gone on mortgages up until now.

By concentrating financing support away from speculative property investments and reserving access to government-supported bank funding to corporate treasuries and smaller firms in future the new BoE Governor Mark Carney is no doubt hoping to get below his 7% unemployment rate, which will enable him to stop the historically low 0.5% base lending rate. Some multinational corporations (MNCs) have benefited from this low rate, of course, locking in low rates by releasing commercial paper but for smaller firms this avenue was often not open to them and bank lending has not picked up enough of the slack (as they hoard money to meet strengthened capital adequacy requirements). The policy change is designed to release this capital for smaller firms and assist job creation investment initiatives by larger companies.

The BoE is also considering strengthening the affordability capital tests for mortgage consumers in the UK to discourage more mortgages above the 4x multiple of salary as part of a separate measure to ward off the perceived threat of a UK house price bubble and aid rebalancing.  

BoE Governor Carney warned during his announcement late yesterday that “an overheated housing market would be a risk to the [UK] economy” as prices rise across London and the surrounding regions, adding that support for mortgage lending “was no longer necessary”.

The separate Help To Buy mortgage scheme, which seeks to help UK buyers amass the high deposits needed to access finance, will still continue.

Reaction and Analysis
Commenting on the announcement UK Business Secretary, Vince Cable, told the ‘BBC’ that: “One decision isn’t going to change quite a deep structural problem. But it is certainly a move in the right direction.” 

Robert Wood, UK economist at Berenberg Bank, predicted that taking away FLS help from mortgages will help to slow UK property prices. It should be seen as the first step in a reenergised campaign to move banks away from mortgage lending and towards more business lending, he advised. The UK has long lacked equivalent institutions to Germany’s Landesbanken or other such institutions that typically help business but previous attempts to kick-start the desired re-balancing, such as project merlin, have failed.

The architect of FLS, UK Chancellor George Osborne, brushing aside rumours of a perceived tussle between the Treasury and BoE over how much to support the housing market to aid economic recovery ahead of the 2015 election, has offered his support to the reforms, commenting on ‘BBC TV’ that “small firms are the lifeblood of the economy”. 

For treasurers monitoring the interest rate prospects of the UK things just got interesting. Speculation is now actively underway about just when the historically low interest rates might wean and wax and unorthodox economic measures such as QE might cease; mirroring the ‘tapering’ discussions at the US Fed. 


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