How reassuring it is to see that pre-emptive action in managing an economy is alive and well and living in the UK, AND that there does exist a tool other than the wide brush of monetary policy for doing it! ! I refer of course to the redirection of the Funding for Lending Scheme (FLS) yesterday.
As I noted yesterday, a solid recovery from recession cannot be extended entirely on domestically driven demand – and a significant proportion of consumer demand in the UK can be directly linked historically to the so called `feel good effect` that people have when they see the value of their homes rise. As house prices in the UK start to show gains spreading north, so the Bank has cancelled the eligibility of mortgage lending to qualify for the FLS. The policy as I see it has two points of focus. Firstly, it points the FLS more pointedly towards small businesses, and expansion in this sector is essential in creating jobs and widening the base of business investment. Secondly, it starts to tackle the issue of addressing a `bubble` in house prices at precisely the right time – that is before it starts to become a real issue. Imagine a scenario whereby prices continue to rise; in the spring and summer of next year there is an acceleration of demand as people panic about missing this move, thereby further fuelling demand. Then, rate rises come into sharp focus, and suddenly a new generation of negative equity holders with increasingly expensive mortgages is upon us.
By its actions, which I think are to be applauded, the Bank has made use of the extra powers given to it by central government via the Financial Policy Committee, and as I commented before, further extensions to the remit are likely by the end of next year.
So what does this action by the Bank say about the wider economy? There have been some alarming conclusions drawn over the past 24 hours! My take is that this is a well timed move designed to try and prevent a bubble developing, and directing funding elsewhere. It is a brave move, and most of all, should be interpreted as a vote of confidence in a still nascent recovery. Policy makers elsewhere should take some heart from this; the thrust being that if confidently delivered, stimulus CAN be withdrawn before events get out of hand, because once they do get out of hand, policy makers can become too scared to act, and can easily get caught in the headlights of potentially destructive asset depreciation. Sound familiar?