By Jonathan Cable
LONDON (Reuters) - Bank of England Governor Mark Carney is right to use the Financial Policy Committee to address rising British house prices rather than interest rates, the great majority of experts in a Reuters poll said.
Carney gave his strongest warning to date on Sunday about the risks of a housing market bubble and said the BoE was looking at new ways to control mortgage lending given that there is still a chronic shortage of home building.
Spurred on by a solid economic recovery, near-zero interest rates and a government scheme to help home buyers, British house prices jumped about 10 percent in the 12 months to April, with prices in London rising by nearly double that rate.
A lack of supply means prices are set to rise nearly 8 percent this year and another 5 percent in 2015, according to a Reuters poll published last week.
All but three of 30 respondents in Reuters's poll, taken over the past several days and before Wednesday's BoE minutes showing some bank officials are moving closer to voting for a rate hike, said the FPC should calm the market with some of the as-yet largely untested "macroprudential" powers it was granted a year ago.
"The housing market remains a cause for concern and the BoE will first attempt to cool it via macroprudential measures," said Peter Dixon at Commerzbank in London.
"But ultimately either much greater rates of construction or higher interest rates will be needed to help restore the market to balance."
The FPC has already tightened rules on lending. It may also force banks to hold more capital against certain types of mortgages, urge caps on how large mortgages can be compared with a borrower's income, or recommend curtailing the "Help to Buy" scheme.
Prime Minister David Cameron said on Tuesday he was prepared to pare back the government scheme, which allows people to buy homes worth up to 600,000 pounds with just a 5 percent deposit, if Carney advised it.
Some banks are already taking action by themselves. On Tuesday, Lloyds Banking Group said it would stop lending at multiples above four times a borrower's income for mortgages of over 500,000 pounds in order to reduce its exposure to London, where prices are rising fastest.
THE RATE DIVIDE
Britain's economy expanded 0.8 percent in the first three months of 2014, its fastest pace in over six years, but the BoE remains broadly reluctant to raise rates as the country is still making up ground lost since the financial crisis.
As in all recent Reuters polls, medians suggest the first move of 25 basis points, taking it to 0.75 percent, will come in the second quarter of next year and be followed by a similar increase the quarter after. However, more than a third said it would come earlier.
Some BoE officials are coming round to the idea of voting for an increase in interest rates, the minutes of their May 7-8 policy meeting showed on Wednesday.
"With the growth story broadening out, we are getting closer to a rate rise from the BoE," said James Knightley at ING.
"Our house view remains that the first hike will probably come in February, but given the strength in growth, employment and asset prices the risks are skewed towards a slightly earlier move."
The poll showed there is only a 30 percent chance the Bank will act before the year is out, unchanged from a May 1 poll. That rises to a more definite 80 percent chance they will have moved before the end of 2015.
Britain's consumers have been a key driver of the economic recovery which began last year. Official data earlier on Wednesday showed retail sales rose much more strongly than expected in April.
Still, growth is expected to slow to 0.7 percent in the current period and then to 0.6 percent per quarter through to the end of September next year, barely changed from last month's poll.
Inflation rose to 1.8 percent in April, but is not forecast to reach the central bank's 2 percent target until the second quarter of next year, around when it is first expected to hike rates.
(Polling by Sarmista Sen and Sarbani Haldar; Editing by Hugh Lawson)